VALUE 


AND 


DISTRIBUTION- 

AN 

HISTORICAL,  CRITICAL,   AND  CONSTRUCTIVE  STUDY 


IN 


ECONOMIC  THEORY 


ADAPTED  FOR  ADVANCED  AND  POST-GRADUATE  WORK 


BY 
CHARLES  WILLIAM  MACFARLANE,  PH.D. 


SECOND   EDITION 


PHILADELPHIA 

J.  B.  LIPP1NCOTT  COMPANY 
1911 


^x^ 

\^ 

^O~ 


COPYRIGHT,  1898, 

BY 
J.  B.  LIPPINCOTT  COMPANY. 


MAIN  LIBRARY 


ELECTROTYPED  AND  PRINTED  BY  J.  B.  LIPPINCOTT  COMPANY,  PHILADELPHIA,  U.S. A. 


THIS    BOOK    IS    GRATEFULLY    DEDICATED 
TO  MY  FRIEND  AND  FORMER  PRECEPTOR 

DR.    EUGEN    VON    PHILIPPOV1CH 

PROFESSOR  OF  POLITICAL  ECONOMY 
IN      THE     UNIVERSITY      OF      VIENNA 

WHO,  WHILE  IN  NO  WAY  RESPONSIBLE 
FOR  THE  OPINIONS  HEREIN  EXPRESSED, 
MAY  YET  FIND  IN  THEM  SOME  REFLEC- 
TION OF  HIS  OWN  CATHOLIC  VIEW  OF 
ECONOMIC  PHENOMENA 


404156 


PREFACE 


last  quarter  Q£  the  nineteenth  century  has 
1  witnessed  more  than  one  noteworthy  advance 
in  economic  theory.  Some  of  this  work  has  been 
embodied  in  permanent  form,  as  in  the  publications 
of  the  Austrian  school  of  economists ;  much  of  it, 
however,  is  scattered  through  various  magazines  and 
journals,  and  its  importance  is  unrecognized  because 
no  effort  has  as  yet  been  made  to  bring  it  together 
as  a  coherent  whole.  One  of  the  purposes  of  the 
present  volume  is  to  give  more  permanent  form  to 
this  scattered  work  and  to  bring  it,  as  well  as  that 
of  the  Austrian  economists,  into  some  sort  of  co- 
relation  with  the  work  of  the  so-called  orthodox 
school  of  economists.  Again,  it  will  be  found  that 
in  the  endeavor  to  give  coherence  to  the  work  of 
previous  writers  certain  concepts  or  theories  are  de- 
veloped that  have  not  been  clearly  stated  elsewhere, 
— concepts  which  more  or  less  seriously  modify  the 
hitherto  accepted  views  of  value  and  distribution. 

The  fact  from  which  all  studies  of  distribution 
must  start  is  the  price  of  commodities,  and  what  we 
have  to  determine  is  how  this  price  is  divided  among 
the  several  parties  to  the  transaction.  From  this 
it  follows  that  any  adequate  study  of  distribution 


PREFACE. 


must  be  prefaced  by  an  examination  of  the  phe- 
nomena of  value  and  price.  In  keeping  with  this 
I  have  devoted  the  first  part  of  the  present  volume 
to  an  attempt  to  answer  the  vexed  question,  What 
do  we  mean  by  value  and  price  ? 

In  the  discussion  of  the  problem  of  distribution, 
the  question  of  the  equity  of  the  distribution  has 
been  consciously  arid  purposely  avoided.  The  im- 
portance of  this  phase  of  the  subject  cannot  well  be 
exaggerated  ;  but  the  laws  according  to  which  the 
social  product  is  distributed  should  first  be  clearly 
defined  before  we  attempt  to  determine  whether  or 
not  this  distribution  is  equitable.  Nothing  is  gained 
either  by  confounding  the  two  problems  or  by  in- 
verting the  order  of  the  inquiry.  In  the  present 
volume  I  shall  strictly  confine  myself  to  the  first 
of  these  problems,  or  to  a  purely  theoretic  study  of 
the  laws  under  which  the  several  shares  in  distri- 
bution are  determined. 

In  the  earlier  days  of  the  present  investigation  I 
regarded  it  strictly  as  a  monograph,  and  addressed 
myself  to  those  who  are  familiar  with  the  whole 
range  of  economic  theory.  As  the  work  progressed, 
however,  it  seemed  that  by  some  modifications  and 
additions  it  might  be  made  available  for  the  ordinary 
advanced  student  or  for  those  who  had  only  been 
over  the  ground  covered  by  the  usual  text-book. 
With  this  larger  audience  in  mind,  I  was  persuaded 
to  adopt  the  topical  form  for  the  presentation  of 
the  subject.  The  shifting  from  one  audience  to 


PREFACE.  yii 

another  during  the  progress  of  the  work  has  re- 
sulted in  an  unevenness  which  could  only  be  elimi- 
nated by  a  careful  rewriting  of  the  entire  book. 
The  pressure  of  other  interests  renders  this  practi- 
cally impossible. 

In  the  desire  to  secure  a  clear  and  coherent  view 
of  a  rather  wide  range  of  economic  phenomena,  I 
have  been  compelled  to  ignore  many  details  whose 
discussion,  though  interesting  and  important,  might 
confound  the  reader,  or  at  least  obscure  his  view  of 
the  main  lines  of  the  argument.  Again,  it  may  be 
that  a  greater  wealth  of  illustrations  would  have 
helped  rather  than  hindered  the  argument.  If  so, 
it  is  an  omission  which  the  intelligent  teacher  can 
readily  supply. 

In  conclusion,  I  have  to  thank  Professor  F.  W. 
Speirs,  of  the  Philadelphia  Manual  Training  School ; 
Professor  H.  R.  Seager,  of  the  University  of  Penn- 
sylvania, and  Professor  John  L.  Stewart,  of  Lehigh 
University,  for  a  careful  reading  of  the  manuscript 
and  for  valuable  criticisms  and  suggestions.  Again, 
I  have  especially  to  thank  Professor  H.  C.  Whitaker, 
of  the  Philadelphia  Manual  Training  School,  who 
spent  several  weeks  with  me  in  a  revision  of  the 
original  manuscript,  thus  enabling  me  to  see  all 
parts  of  the  argument  through  the  eyes  of  another. 
It  was  at  his  suggestion  that  the  topical  form  was 
adopted.  This  has  undoubtedly  added  much  to  the 
clearness  of  the  entire  argument. 


CONTENTS. 


INTRODUCTION. 

PAGE 

A  necessary  relation  exists  between  the  economic  theories  and  the 

economic  phenomena  of  a  time  and  people xix 

Contrast  between  the  economic  phenomena  in  England  during  the 

first  and  last  quarters  of  the  nineteenth  century xx 

The  corresponding  change  in  economic  theory  is  not  yet  complete   .  xxii 


PART     I.— VAIAJE. 

CHAPTEE    I. 
THE  COST  THEORY  OP  VALUE. 

I.    THE  EARLIER  COST  THEORY. 

1.  Paradoxes  of  value  explained  by  the  Cost  Theory 20 

2.  Free  goods  eliminated  from  economic  consideration 20 

3.  Scarcity  goods  eliminated  because  of  their  rare  occurrence  ...  21 

4.  The  Law  of  Cost  only  applicable  to  freely  reproducible  goods    .  21 

II.    THE  MARGINAL  COST   THEORY. 

5.  The  graphical  representation  of  Marginal  Cost  Theory    ....      22 

6.  Ricardo's  statement  of  the  Marginal  Cost  Theory  .    .    . 

CHAPTER    II. 

CONDITIONS    UNDER    WHICH    THE    COST    THEORY 

FAILS. 

I.    THE  CONTENTION   OF  THE  AUSTRIAN   ECONOMISTS. 

7.  Exceptions  admitted  by  Kicardo 25 

8.  Additional  exceptions 26 

II.  CASES   IN    WHICH    THE  CONTENTION   OF  THE  AUSTRIANS 

FAILS. 

9.  Marginal  Cost  Theory  holds  for  products  of  better  land,  etc.  .    .      27 

10.  Marginal  Cost  Theory  holds  for  products  of  fixed  capital     ...      27 

III.  CASES  IN   WHICH   THE  CONTENTION   OF  THE  AUSTRIANS 

MAY   BE  SUSTAINED. 

11.  Fatents,  Tariffs,  etc 28 

ix 


X  CONTENTS. 

CHAPTEE    III. 
THE  UTILITY  THEORY  OF  VALUE. 

I.    THE  EARLIER  UTILITY  THEORY. 

PAGE 

1^    The  failure  of  the  Earlier  Utility  Theory  to  explain  the  para- 
doxes of  value 30 

II.    THE  MARGINAL  UTILITY  THEORY  OF  VALUE. 

13.  Gossen  and  his  work 32 

14.  Jevons,  Walras,  and  Menger 34 

15.  Bdhm-Bawerk's  statement  of  the  Theory  of  Marginal  Utility  .  35 

16.  Graphic  illustration  of  the  Marginal  Utility  Theory 37 

(a)  Value  per  Unit  versus  Total  Value 38 

(6)  Total  Value  versus  Total  Utility 38 

17.  The  Marginal  Utility  Theory  and  the  paradoxes  of  value  ...  39 

(a)  Why  are  air  and  water  valueless,  and  why  is  iron  of  less 

value  than  gold  ? 39 

(b)  Why  did  the  Dutch  East  India  Company  destroy  a  por- 

tion of  their  crops  ? 40 

CHAPTER    IV. 

CONDITIONS   UNDER  "WHICH  THE  UTILITY  THEORY 

PAILS. 

18.  Bohm-Bawerk's  admitted  exceptions  to  the  Law  of  Marginal 

Utility 43 

19.  How   Bohm-Bawerk   would  escape  from   the  consequences  of 

these  admissions 45 

(a)  The  Elimination  of  the  marginal  pair  of  sellers     ...  46 

(6)  The  Elimination  of  one  of  the  two  marginal  buyers  .    .  47 

20.  The  defect  in  the  analysis  of  the  Austrian  economists 48 

(a)  The  Marginal  Utility  Theory  rests  upon  the  unwar- 

ranted assumption  of  free  competition  among  con- 
sumers       48 

(b)  Marginal   Utility  Theory  fails  because  the  marginal 

consumer  frequently  secures  a  surplus 50 

CHAPTER    V. 
THE  MONOPOLY  THEORY  OF  PRICE. 

I.    THE  PRICE  OF  A   SINGLE  GOOD. 

21.  Normal  Value  and  Price 66 

22.  Other  conditions  under  which  Marginal  Utility  determines  Price  66 

23.  The  diagram  of  the  Austrian  economists ' 68 

24.  Diagram  of  the  Monopoly  Theory  of  Price 58 

II.  THE  PRICE  OF  COMPLEMENTARY  GOODS. 

25.  The  confusion  in  the  Austrian  treatment  of  complementary 

goods 60 

26.  Complementary  goods  an  ordinary  case  of  scarcity  price     ...      61 


CONTENTS.  xl 

CHAPTBE    VI. 
VALUE  AND  PRICE. 

PAGE 

27.  Subjective  Exchange  Value  is  not  a  primary  phenomenon  of 

value        ........................      64 

28.  Use  and  Exchange  Value  versus  Value  and  Price     ......      65 

CHAPTEK    VII. 
COST  AND  PRICE. 

I.    THE  LAW  OF   COST   AND   THE   PRICE  OF   FREELY   REPRO- 
DUCIBLE GOODS. 

29.  The  Law  of  Cost  is  here  an  exact  law  ............      68 

30.  Cost  is  here  a  direct  cause  of  Value  .v  ............      69 

II.    THE   LAW   OF   COST   AND   THE  PRICE  OF   SCARCITY  GOODS. 

31.  A  substitute  always  possible   ...............      71 

32.  The  substitute  is  in  last  resort  a  freely  reproducible  good     ...      73 


CHAPTEE  VIII. 

DISTRIBUTION    AND  THE  THEORIES  OP  UTILITY, 
VALUE,   AND  PRICE. 

33.  Society  is  interested  in  the  increase  of  Total  Utility  ......  74 

34.  The  individual  interested  in  the  increase  of  Total  Value  ....  76 

35.  Disadvantages  of  the  orthodox  attitude    ...........  77 

36.  Advantages  and  disadvantages  of  the  Austrian  attitude  ....  78 


II.— DISTRIBUTION. 
BOOK    L— RENT. 

CHAPTER    I. 
THE  RENT  OP  LAND. 

I.    FUNDAMENTAL  PROPOSITIONS. 

37.  An  Agrarian  doctrine 83 

38.  Kent  does  not  enter  into  the  determination  of  price 84 

39.  Diagram  of  rent 85 

40.  Kent  due  to  difference  in  fertility  and  distance  from  market    .    .  87 

41.  Law  of  Diminishing  Returns 88 

42.  Effect  of  Improvements 88 


CONTENTS. 


II.     HISTORICAL  DEVELOPMENT   OF   THE  DOCTRINE   OF   RENT. 

PAGE 

43.  Adam  Smith 89 

44.  Criticism  of  Smith 90 

45.  Anderson 9 91 

46.  Malthus * 95 

47.  West 96 

48.  Eicardo 97 

49.  Criticisms  of  Kicardo 99 

CHAPTEE    II. 
THE  GENERAL  DOCTRINE  OF   RENT. 

I.    THE  DOCTRINE  IN   ENGLISH   ECONOMICS. 

50.  Whately  on  the  General  Doctrine  of  Eent 102 

61.  J.  S.  Mill  on  the  General  Doctrine  of  Kent 103 

62.  Walker  on  the  Kent  of  entrepreneur 104 

53.  Marshall  on  the  Kent  of  capital    .    .        105 

54.  Clark  and  Hobson  on  the  General  Doctrine  of  Rent 106 

II.    THE  DOCTRINE  IN   GERMAN   ECONOMICS. 

65.  Busch  on  the  Kent  of  labor 107 

66.  Hufeland  on  the  General  Doctrine  of  Rent 108 

(a)  Rent  of  land 108 

(b)  Rent  of  capital 109 

fe)  Rent  of  labor 109 

(d)  Kent  of  unternehmer 109 

67.  Mangoldt  on  the  General  Doctrine  of  Rent Ill 

(a)  Rent  of  land 112 

(6)  Rent  of  capital 112 

(c)  Rent  of  labor 113 

(d)  Rent  of  unternehmer 114 

68.  Schaffle  on  the  General  Doctrine  of  Rent 116 

69.  The  Austrians  on  the  General  Doctrine  of  Rent    ....  ,117 


BOOK  H.— PROFIT. 

CHAPTEE    I. 
PROFIT  A  PRICE-DETERMINING  SURPLUS. 

I.     RENT  AND   PROFIT  AND  THEIR   POINTS   OF  DIFFERENCE. 

60.  Rent  an  individual,  Profit  a  group  surplus 122 

61.  Rent  a  differential,  Profit  a  marginal  surplus 122 

62.  Rent  a  limited  monopoly,  Profit  a  monopoly  surplus 123 

63.  Rent  a  price-determined,  Profit  a  price-determining  surplus    .    .  124 

64.  Competing  differential  concepts 126 

II.    INTEREST  AND   PROFIT   AND   THEIR   POINTS   OF   DIFFERENCE. 

65.  Interest  a  normal,  Profit  a  monopoly  surplus 127 


CONTENTS. 


CHAPTEE    II. 
PROFIT  AND  THE  CONCEPT  OF  A  NO-BENT  LAND. 

PAGE 

66.  Mill's  admissions  and  their  logical  result      ..........    129 

67.  Mill  inadvertently  includes  a  marginal  surplus,  or  Profit  under 

Rent     .    .    .    .*  .....................  131 

68.  Eent  the  differential  surplus  in  a  single  industry  .......  132 

69.  Hobson's  objections  to  this  use  of  the  term  Rent  .......  133 

70.  Objections  to  Walker's  use  of  the  term  Profit    ........  135 

71.  The  suggested  use  of  the  terms  Rent  and  Profit    .    .    t    ,    ,    .    .  137 


BOOK  in.— INTEREST. 

CHAPTER    I. 
EARLIER  IDEAS  IN  REGARD  TO  INTEREST. 

I.  USURY   IN   LESS   DEVELOPED  SOCIETIES  ;   INTEREST  IN   HIGHLY 

DEVELOPED  SOCIETIES. 

72.  Aristotle 139 

73.  Calvin 140 

74.  Locke 141 

II.  INTEREST  A  RETURN  FOR  THE  USE  OF  WEALTH  AND  NOT  FOR 

THE  USE  OF  MONEY. 

75      Hume  141 

76.  Adam  Smith 143 

CHAPTER    II. 

THE  EXPLOITATION  THEORY  OF  INTEREST. 

77.  The  contention  that  the  value  of  all  goods  is  measured  by  quan- 

tity of  labor 146 

(a)   Ricardo  and  the  case  of  scarcity  goods 146 

(6)  What  labor  is  the  standard  of  value  ? .  149 

78.  Contention  that  capital  is  notun  original  and  independent  source 

of  value 152 

(a)  Natural  goods  are  sometimes  original  powers 152 

(b)  Capital  an  independent  power 153 

79.  The  contention  that  the  whole  product  belongs  in  equity  to  the 

laborer 154 

CHAPTER    III. 

THE  USE  THEORY  OF  INTEREST. 

80.  Menger's  statement  of  the  Theory 160 

81.  Criticism  of  Menger's  statement 162 


XIV 


CONTENTS. 


CHAPTEK    IY. 
THE  EARLIER  PRODUCTIVITY  THEORY  OP  INTEREST. 

I.  CONTINENTAL    WRITERS     FAIL     TO     SEE     THAT     INCREASE    IN 

PRODUCT   DOES   NOT   NECESSARILY   MEAN   AN   INCREASE  IN 
VALUE. 

PAGE 

82.  Say 164 

83.  Kiedel 165 

II.  ENGLISH    WRITERS   SAW   THAT   INCREASE   IN    PRODUCT    DOES 

NOT    NECESSARILY     MEAN     AN     INCREASE    IN    VALUE,    BUT 
FAILED  TO  SUPPLY  THE  ELLIPSIS  IN  THE  ARGUMENT. 

84.  Lauderdale 168 

86.     Malthus 170 

86.  Ellipsis  in  the  argument  of  the  advocates  of  productivity  .    .    .    171 

III.  INCREASE   IN   PRODUCT   IS   NOT   A   NECESSARY   CONDITION   OP 

INTEREST. 

87.  Bohm-Bawerk  fails  to  recognize  the  cause  of  the  confusion    .    .    171 


CHAPTEK    Y. 

THE  ABSTINENCE  THEORY  OP  INTEREST. 

88.  Senior's  statement  of  the  Theory 173 

89.  Lasalle's  philippic 176 

90.  Bohm-Bawerk's  contention 176 

91.  Reply  to  Bohm-Bawerk 176 

92.  Another  objection  to  the  Abstinence  Theory 177 

93.  Reply  to  this  objection 179 

94.  Still  another  objection  to  the  Abstinence  Theory 180 

CHAPTER    VI. 

INTRODUCTION  TO  THE  EXCHANGE  THEORY  OP 
INTEREST. 

96.     Capital  is  concerned  with  time  utilities 183 

96.  The  rationale  of  machine  methods  of  production 186 

97.  Machine  production  not  a  necessary  condition  of  interest   .    .   .  186 

98.  The  definition  of  capital 187 

99.  Difficulties  encountered  by  this  definition 188 


CHAPTER    VII. 
THE  EXCHANGE  THEORY  OF  INTEREST. 

I.  PRESENT  GOODS  ARE  WORTH  MORE  THAN  FUTURE  GOODS. 

100.  Differences  in  provision  and  underestimate  of  the  future    .    .    .    192 

101.  Roundabout  methods  of  production 193 

102.  Technical  superiority  of  present  goods 193 


CONTENTS.  XV 


CHAPTEE    VIII. 

CRITICISM    OP    THE    EXCHANGE    THEORY    OP 
INTEREST. 

I.     ARE   PRESENT   GOODS   WORTH    MORE   THAN   FUTURE   GOODS? 

PAGE 

103.  Admitted  exceptions  to  this  contention 195 

104.  Additional  exceptions 196 

105.  These  exceptions  are  not  fatal  to  the  Exchange  Theory  of 

Interest 198 

II.    ABSTINENCE  IN   THE   EXCHANGE  THEORY   OF   INTEREST. 

106.  Interest  measured  by  marginal  abstinence 200 

107.  Abstinence  recognized  in  the  Exchange  Theory 200 

(a)  Difference  in  provision 200 

(b)  Underestimate  of  the  future 201 

III.     IS  THE  TECHNICAL,  SUPERIORITY   OF   PRESENT   GOODS  A 
NECESSARY   CONDITION   OF  INTEREST? 

108.  Technical  superiority  an  increase  in  quantity  of  product  .    .    .    202 

109.  Defects  in  Bohm-Bawerk's  reasoning 203 

(a)  Technical  superiority  not  an  independent  cause  of 

value  ....  204 

(6)  The  technical  superiority  of  present  goods  does  not 

necessarily  result  in  an  increase  in  value 206 

(c)  Technical  superiority  of  present  goods  is  not  an  essen- 

tial condition  of  interest   ...  210 


CHAPTEE  IX. 

THE    MARGINAL,    PRODUCTIVITY    THEORY    OP 
INTEREST. 

I.    COMPETING  CONCEPTS  OF  CAPITAL. 

110.  Capital  as  a  sum  of  concrete  commodities 214 

111.  Capital  as  a  mobile,  homogeneous  fund 214 

II.     RATE  OF  INTEREST   FIXED   BY   MARGINAL   PRODUCTIVITY. 

112.  Clark  on  the  mobility  of  capital 217 


CHAPTEE    X. 
THE  NORMAL- VALUE  THEORY  OP  INTEREST. 

I.  INTEREST  A  PROBLEM  IN  NORMAL  VALUE. 

113.  The  source  of  Bohm-Bawerk's  error 223 

114.  Bohm-Bawerk's  confused  recognition  of  the  part  played  by 

abstinence 225 

115.  Statement  of  the  Normal-Value  Theory 228 


XVi  CONTENTS. 

BOOK  IV.—  WAGES. 
CHAPTBE    I. 

THE    WAGES    FUND    DOCTRINE. 

I.    THE  EARLIER  ADVOCATES  OF  THE  THEORY. 

116.     Adam  Smith    ......................    232 

1}7.     James  Mill  .......................    233 

118.  Kicardo  .........................    233 

II.    THE  LATER  ADVOCATES  AND  CRITICS  OF  THE  THEORY. 

119.  J.  S.  Mill's  statement  of  the  theory   ............    235 

(a)  Mill's  contention  that  Trades  Unions  cannot  increase 

wages  .....................    236 

120;     Longe's  criticism  of  Mill  .................    237 

121.  Thornton's  theory  of  price  and  wages    ...........     238 

122.  The  importance  of  Thornton's  theory  of  price  not  generally 

recognized  .....................  241 

123.  One  source  of  confusion  in  Thornton's  discussion    ......  244 

124.  There  is  no  fund  set  apart  for  the  payment  of  wages  .....  247 

125.  Mill's  reply  to  Thornton   ..........    ......  250 

126.  Wages  are  affected  by  the  productivity  of  labor  .......  252 

127.  Cairnes's  attempt  to  rehabilitate  the  doctrine    ........  253 

128.  The  element  of  truth  in  the  Wages  Fund  Doctrine    .....  254 

129.  The  source  of  the  confusion  ................  255 


CHAPTER    II. 
THE  RESIDUAL  CLAIMANT  THEORY  OF  WAGES. 

130.  Profits  the  residual  share  according  to  the  earlier  economists    .  256 

181.  Cairnes's  statement  of  the  Kesidual  Claimant  Theory  of  Wages  257 

132.  Walker's  Kesidual  Claimant  Theory  of  Wages    .......  258 

133.  Criticism  of  Walker's  theory    ...............  260 


CHAPTER    III. 
THE   PRODUCTIVITY  THEORY   OP  WAGES. 

I.     THE  GENERAL  PRODUCTIVITY  THEORY  OF  WAGES. 

134.  Walker's  contention 265 

II.    MARGINAL  PRODUCTIVITY  THEORY  OF  WAGES. 

135.  Concrete  and  abstract  concepts  of  labor 267 

136.  The  abstract   fund    remains    constant   while   concrete   forms 

change 269 

137.  The  rate  of  wages  determined  by  the  marginal  productivity  of 

labor  .  .   ,   ,   ,  .270 


CONTENTS.  XV11 


III.     THE  ELEMENT  OF  TRUTH  IN  THE  WAGES  FUND    DOCTRINE. 

PAGE 

138.  Capital  constant,  population  increasing 271 

139.  Population  constant,  capital  increasing 272 

140.  A  certain  best  ratio  of  capital  and  labor 272 

141.  Application  to  the  Wages  Fund  Doctrine 273 

IV.    OBJECTIONS  TO  THE  MARGINAL  PRODUCTIVITY  THEORY. 

1 42.  What  determines  the  margin  of  production  ?     What  limits  the^"  "*  | 

supply  of  labor? I   274 


CHAPTEE    IV. 
THE  MALTHUSIAN  THEORY  OF  WAGES. 

I.    THE  EARLIER  MALTHUSIAN  THEORY   OF  WAGES. 

143.  The  pressure  of  population  upon  subsistence 276 

144.  The  function  of  misery  and  vice 277 

145.  The  standard  of  life 277 

146.  The  pressure  not  remote  but  immediate 278 

147.  The  issue  between  Malthus  and  Godwin 279 

II.    THE   LATER   MALTHUSIAN  THEORY  OF  WAGES  AND  THE  CON- 
DITIONS OF  PROGRESS. 

148      Virtue  and  intelligence  as  checks  to  population 281 

149.  Increase  of  the  food  supply  an  essential  condition  of  progress  .  282 

150.  Manufactures  and  an  advancing  standard  of  life 283 

151.  Progress  depends  on  the  supply  of  capital  as  well  as  on  the 

supply  of  land 284 

152.  Malthus 's  changed  view  of  society 287 

153.  The  unfair  treatment  of  Malthus    .                                            .  288 


CHAPTEE    Y. 
THE  NORMAL  VALUE  THEORY  OF   WAGES. 

I.    THE  GAIN  AND   ABSTINENCE  OF  LABOR. 

164.  Clark's  failure  to  recognize  the  abstinence  of  labor 291 

165.  Patten  on  the  abstinence  of  labor 293 

156.     Clark's  restatement  of  Patten's  contention 294 

II.    A   NORMAL  VALUE  OR  AN   EXCHANGE  THEORY  OF  WAGES. 

157      The  time  utilities  of  labor 297 

158.  The  exchange  by  the  laborer  of  present  for  future  goods  .    .    .  299 

159.  Confusion  in  Patten's  use  of  the  terms  cost  and  surplus     .    .    .  299 

160.  The  modification  of  Patten's  diagram 302 

161.  The  Normal  Value  Theory  only" applies  to  normal  conditions 

in  a  progressing  society 302 

162.  Failure  to  secure  this  gain  due  to  loss  of  mobility   ,,,...  304 


xviii  CONTENTS. 

KESUM& 

I.    VALUE. 

PAGE 

163.  The  Cost  Theory  and  its  failure 305 

164.  The  Utility  Theory  and  its  failure 305 

165.  Price  determined  between  limits 306 

166.  Cost  and  price 306 

II.     DISTRIBUTION. 

167.  Kent 307 

168.  Profit 308 

169.  Interest „    .    .    .  309 

170.  Wages 310 

171.  Factors  of  production  versus  different  forms  of  surplus  .    .    .    .  312 

172.  An  essentially  different  scheme  of  distribution  from  that  pro- 

posed by  Clark 316 


INTRODUCTION. 


IT  has  frequently  been  remarked  that  there  is  a 
necessary  correspondence  between  the  economic  theo- 
ries and  the  economic  phenomena  of  a  time  and 
people.  The  economist,  like  every  other  purveyor 
of  truth,  is,  to  a  greater  or  less  extent,  "  cribbed, 
cabined,  and  confined"  by  the  facts  of  his  immediate 
environment.  Strive  as  he  may  to  forecast  the  fu- 
ture, his  speculations  seldom  far  outrun  the  progress 
of  material  phenomena.  Indeed,  there  is  always  a 
grave  danger  that  his  theories  will  crystallize  in  such 
fixed  and  definite  forms  that  they  will  fail  to  respond 
to  the  never-resting  progress  of  the  events  they  are 
supposed  to  explain.  Nowhere  does  this  find  more 
apt  illustration  than  in  the  utter  lack  of  correspond- 
ence between  theory  and  phenomena  in  the  third 
quarter  of  the  nineteenth  century.  Again,  in  the 
almost  revolutionary  change  in  the  whole  status  of 
the  theories  of  value  and  distribution  which  the  last 
quarter  of  the  century  has  witnessed,  we  have  a 
belated  attempt  to  bring  our  theories  into  some  sort 
of  harmony  with  the  existing  facts. 

The  most  cursory  examination  of  the  economic 
conditions  of  the  first  and  last  quarters  of  the  nine- 
teenth century  will  reveal  a  sharp  contrast  in  the 

xix 


XX  INTRODUCTION. 

tendency  of  the  phenomena  of  the  two  periods.  For 
example,  in  England,  in  the  first  quarter,  we  find  all 
restrictions  of  trade  giving  way  before  the  industrial 
revolution  that  was  then  at  its  height.  The  intro- 
duction of  steam  and  the  substitution  of  the  factory 
for  the  home  system  of  industry  had  well-nigh  com- 
pleted the  destruction  of  the  old  craft  and  guild 
system.  The  growing  power  of  the  new  middle  class 
that  had  arisen  with  the  development  of  the  factory 
system  was  now  asserting  itself.  It  insisted  upon  the 
abolition  of  the  corn  laws  and,  secure  in  its  estab- 
lished industries,  was  willing  to  accept  a  gradual  re- 
duction of  import  duties.  In  a  word,  the  English 
economists  of  the  early  part  of  the  century  were  con- 
fronted by  the  phenomena  of  the  rapid  breaking 
down  of  all  those  trade  restrictions  which  time  and 
custom  had  rendered  sacred.  It  is  therefore  not 
strange  that  they  should  have  concluded  that  the 
day  was  not  far  distant  when  the  ideal  of  free  com- 
petition would  be  realized  in  the  actual  facts  of  in- 
dustrial life.  Indeed,  such  progress  had  been  made 
in  this  direction  by  the  middle  of  the  century  that 
J.  S.  Mill  writes,  "scarcity  values  are  rather  con- 
ceivable than  actually  existing." 

The  last  quarter  of  the  century  has  witnessed  a 
rude  awakening  from  this  pleasant  dream ;  the  ten- 
thousand-acre  farms,  the  organization  of  labor  in 
large  and  compact  masses,  the  aggregation  of  great 
masses  of  capital  into  an  even  more  complete  soli- 
darity,— all  evidence  the  utter  collapse  of  that  ideal 


INTRODUCTION. 


XXI 


of  free  competition  which  Mill  thought  was  about  to 
be  realized.  As  another  has  well  said,  "  Just  when 
the  disappearance  of  the  last  vestige  of  a  volitional 
restriction  of  competition  was  looked  for,  .and  the 
universal  application  of  the  '  rule  of  the  market'  was 
confidently  expected,  we  see  a  wide-spread  revival 
of  economic  methods  and  agencies  over  which  '  The 
Wealth  of  Nations'  was  read  as  a  funeral  service.-"  * 

This  rise  of  the  modern  system  of  labor  organiza- 
tions, trusts,  etc.,  has  compelled  a  radical  change  in 
the  attitude  of  economists  towards  the  theories  of 
value  and  distribution.  They  no  longer  hold  that 
scarcity  values  are  "  rather  conceivable  than  actually 
existing."  Indeed,  Mill's  contention  might  well  be 
reversed,  since  scarcity  goods  are  the  rule  rather 
than  the  exception.  It  is  the  recognition  of  this  fact 
that  has  constrained  many  economists  to  abandon  the 
Cost  Theory  of  Value  and  to  substitute  for  it  the 
Marginal  Utility  Theory  of  Value. 

It  is,  however,  strange  that  the  most  strenuous 
advocates  of  the  Marginal  Utility  Theory  of  Value 
have  failed  to  see  that  this  recognition  of  the  general 
prevalence  of  scarcity  values  must  compel  the  re- 
adjustment of  our  theory  of  distribution.  The  old 
scheme,  which  divided  the  social  surplus  into  rent, 
wages,  and  interest,  was  based  on  the  assumption  of 
free  competition.  If  this  assumption  does  not  cor- 

*  See  The  Modern  Distributive  Process,  by  Clark  and  Gid- 
dingn,  p.  20. 


INTRODUCTION. 

respond  with  the  facts, — if  scarcity  values  do  pre- 
vail,— then  the  surplus  due  to  such  scarcity  value 
must  receive  recognition  and  name  in  our  scheme  of 
distribution.  And  yet  modern  economists  have,  for 
the  most  part,  either  followed  Bicardo  and  con- 
founded this  surplus  with  interest,  or  have  followed 
Mill  in  the  passage  just  quoted  and  confounded  it 
with  rent. 

Again,  economists,  especially  those  of  the  Austrian 
school,  have  insisted  so  strongly  upon  the  general 
prevalence  of  scarcity  values  among  concrete  com- 
modities that  they  have  failed  to  see  that  in  the 
problem  of  interest  we  are  dealing  entirely  with  nor- 
mal value,  or  with  that  phenomenon  of  value  in 
which  marginal  utility  and  marginal  disutility  coin- 
cide. Failing  to  see  this,  Bohm-Bawerk,  formally 
and  in  the  most  uncompromising  way,  repudiates  ab- 
stinence as  having  any  part  in  the  determination  of 
interest. 

Possibly  the  most  important  contribution  of  Ameri- 
can economists  has  been  to  the  theory  of  wages ;  and 
yet,  though  establishing  almost  every  point  neces- 
sary to  the  construction  of  an  Exchange  Theory 
of  Wages  corresponding  in  all  respects  to  Bohm- 
Bawerk's  "  Exchange  Theory  of  Interest,"  they  have 
failed  to  recognize  the  possibility  of  such  a  theory  of 
wages. 

There  is  one  other  change  in  the  drift  of  economic 
thought  which  must  also  be  examined  with  some 
care.  This  is  the  growing  tendency  to  recognize  the 


INTRODUCTION. 

fact  that  rent  is  not  peculiar  to  land,  but  is  a  general 
function  common  to  all  the  factors  of  production.  In 
German  economics  this  general  character  of  the  rent 
function  was  recognized  as  early  as  1807,  but  in  Eng- 
lish literature  it  was  not  until  the  last  quarter  of  the 
century  that  the  movement  in  this  direction  became 
at  all  general.  The  reason  for  this  delayed  recog- 
nition by  English  economists  is  found  in  the  accent 
thrown  upon  the  rent  of  land  by  the  English  corn 
law  agitation. 

In  sketching  the  history  of  economic  theory,  how- 
ever, one  must  not  only  keep  in  mind  its  correspond- 
ence with  economic  phenomena,  but  must  be  persist- 
ent in  recognizing  the  continuity  in  its  development. 
The  Abstinence,  Productivity,  and  Use  Theories  of 
Interest,  for  instance,  cannot  be  dismissed  as  so  many 
vain  attempts  to  solve  a  difficult  problem,  but  instead 
they  must  be  seen  as  parts  of  a  progressive  movement 
in  thought  which  resulted  in  the  Exchange  or  Normal 
Value  Theory  of  Interest.  In  other  words,  the  rec- 
ognition of  this  continuity  is  as  essential  to  the  right 
understanding  of  the  history  of  economic  theory  as  to 
the  right  understanding  of  any  other  phase  of  human 
endeavor.  If  this  continuity  in  thought  is  clearly 
developed  in  the  historic  part  of  the  present  study 
the  writer  will  have  attained  at  least  some  measure 
of  success. 


PART  !. 
VALUE. 


VALUE  AND   DISTRIBUTION. 


CHAPTER    I. 

THE  COST  THEORY  OF  VALUE. 

A  RECENT  writer  has  well  said,  "  There  are  certain 
unsettled  questions  in  economic  theory  that  have  been 
handed  down  as  a  sort  of  legacy  from  one  generation 
to  another ;"  questions  that  "  return  again  and  again, 
like  troubled  spirits  doomed  restlessly  to  wander 
until  the  hour  of  their  deliverance  shall  appear." 
Among  these  is  the  question,  "  What  is  the  ultimate 
standard  of  value  ?"  * 

Any  attempt  to  answer  this  question  is  confronted 
by  certain  facts  which  are  usually  referred  to  as  the 
paradoxes  of  value.  These  are  as  follows :  1.  The 
most  useful  things,  like  air  and  water,  are  usually 
without  value.  2.  Useful  things,  like  iron  and  cop- 
per, are  not  valued  as  highly  as  less  useful  things, 
like  gold  or  diamonds.  3.  By  decreasing  the  supply 
of  a  commodity,  and  consequently  the  total  utility  to 
be  obtained  from  it,  the  total  value  may  be  increased. 

*  Bohm-Bawerk,  Annals  of  American  Academy,  September, 
1894. 

19 


t  ^ALTIE  AND  DISTRIBUTION. 

This  was  done  by  the  Dutch  East  India  Company 
when  it  destroyed  a  portion  of  the  produce  of  its  plan- 
tations in  order  to  enhance  the  price  of  the  balance. 
We  have  now  to  inquire  what  explanation  the  cost 
theory  can  offer  for  these  paradoxes  of  value. 

I.    THE  EARLIER  COST  THEORY. 

It  was  not  long  before  men  perceived  that  in  most 
instances  there  is  a  correspondence  between  the  value 
of  a  commodity  and  its  cost  of  production  ;  nor  were 
they  long  in  recognizing  the  further  fact  that  this 
cost  could  be  made  to  explain  at  least  two  of  the 
above  paradoxes  of  value. 

1.  Paradoxes  of  Value   explained   by  the  Cost 
Theory. — With  regard  to  the  first  parodox  the  solu- 
tion is  evident.     Such  things  as  air  and  water  have 
no  value  because  they  have  no  cost. 

The  solution  of  the  second  paradox  is  almost  as 
patent :  Gold  is  more  valuable  than  iron  because  on 
the  whole  it  costs  more  than  iron. 

In  the  case  of  the  third  paradox  the  solution  is  not 
so  evident.  But  then  it  might  be  urged  that  a  wilful 
destruction  of  commodities  is  of  rare  occurrence,  that 
the  limitation  of  supply  which  is  here  affected  in  an 
arbitrary  way  is  usually  determined  by  the  cost  of 
production.  In  other  words,  we  here  have  the  ex- 
ception that  proves  the  rule. 

2.  Free  Goods  eliminated  from  Economic  Con- 
sideration.— Tested  by  the  facility  with  which  these 
complications  were  resolved,  the  advocates  of  the  cost 


THE  COST  THEORY  OF  VALUE.  21 

theory  certainly  had  a  strong  case.  Yet  from  the 
very  first  they  hesitated  to  accept  the  logical  results  of 
their  own  reasoning.  For  if  cost  determines  value, 
then  things  like  air  and  water,  which  have  no  cost, 
can  have  no  value.  This,  however,  they  were  not  pre- 
pared to  admit,  but  declared  that  while  such  goods 
had  "  value  in  use"  they  had  no  "  exchange  value." 
But  having  thus  established  the  distinction  between 
these  two  forms  of  value  they  proceed  to  discuss 
"  value  in  exchange,"  and  do  not  trouble  themselves 
any  further  about  "  value  in  use."  It  is  necessary  to 
bear  in  mind,  however,  that  this  did  not  involve  the 
classical  writers  in  any  inconsistency.  For  the  phe- 
nomenon of  "  value  in  use"  was  in  their  minds  as- 
sociated with  free  goods,  and  so  might  fairly  be 
dismissed  from  economic  consideration. 

3.  Scarcity   Goods   eliminated  because  of  their 
Rare  Occurrence. — The  classical  school  did  not  get 
far  in  its  attempts  to  apply  the  cost  theory  to  the 
actual  phenomena  of  economic  life  before  it  was  con- 
fronted by  goods  whose  value  was  far  in  excess  of  the 
cost  either  of  production  or  of  reproduction.     This 
is  the  case  with  rare  wines,  pictures  by  the  old  mas- 
ters, etc.     It  was  held,  however,  that  such  monopoly 
or  scarcity  goods  are  so  small  a  part  of  the  world's 
exchanges  that  they  may  safely  be  ignored  in  any 
discussion  of  the  general  phenomena  of  value. 

4.  The  Law  of  Cost  only  applicable  to  Freely  Re- 
producible Goods. — Having  eliminated  both  free  and 
scarcity  goods  from  the  problem,  the  only  phenomena 


22  VALUE  AND  DISTRIBUTION. 

of  value  left  for  the  older  economists  to  explain  were 
such  as  are  associated  with  freely  reproducible  goods. 
In  regard  to  such  goods,  it  was  held  that  if  the  pro- 
ducer does  not  at  least  obtain  his  cost  he  will  cease  to 
produce ;  if  he  secures  a  surplus  above  his  cost,  others 
will  enter  that  branch  of  industry  and  increase  the 
supply  of  the  commodity  until  the  price  is  forced 
down  to  the  level  of  cost.  This  led  the  older  econ- 
omists to  conclude  that  in  cost  we  have  a  more  or 
less  exact  measure  of  'value.  So  satisfactory  did  this 
theory  prove  to  be,  so  strong  its  hold  upon  economic 
thought,  that  it  was  not  until  the  last  quarter  of  the 
present  century  that  another  theory  could  find  even 
a  respectful  hearing. 

II.    THE  MARGINAL  COST  THEORY. 

The  earlier  cost  theory  long  found  general  accept- 
ance, but  it  is  manifest  that  it  fails  to  account  for  the 
products  of  better  land  and,  in  general,  for  all  com- 
modities not  produced  at  the  margin.  Yet  it  is  not 
a  difficult  matter  to  state  the  theory  so  as  to  include 
all  such  commodities.  This  is  done  by  substituting 
for  the  vague  and  indefinite  concept  of  cost  which 
the  earlier  economists  had  in  mind  the  very  definite 
concept  of  marginal  cost. 

5.  The  Graphical  Representation  of  Marginal 
Cost. — This  concept  of  marginal  cost  may  be  shown 
graphically,  as  in  Fig.  1.  The  amount  of  commodity 
is  here  laid  off  along  the  line  OM.  Other  things 
remaining  the  same,  the  cost  of  production  of  sue- 


THE  COST  THEORY  OF  VALUE.  23 

cessive  increments  of  commodity  increases,  and  is 
represented  by  lines  at  right  angles  to  OM.  Thus,  if 
the  amount  of  the  commodity 
is  represented  by  the  length  FIG.  i. 

of  the  line  OA,  then  the  cost 
of  production  of  the  last  in- 
crement added  to  the  stock  is 
represented  by  the  length  of 
the  line  AD.  As  in  general  ° 
the  cost  of  production  increases  with  each  successive 
increment  of  commodity,  the  line  of  cost,  ODN,  is 
an  ascending  line. 

6.  Ricardo's  Statement  of  the  Marginal  Cost 
Theory. — Eicardo,  in  his  discussion  of  the  rent  of 
land,  shows  that  every  increase  in  the  supply  of  corn 
compels  us  to  have  recourse  to  less  and  less  fertile 
lands  or  to  an  ever-increasing  cost  of  production. 
He  further  contends  that  the  value  of  corn  is  deter- 
mined by  the  cost  of  the  last  or  most  expensive  incre- 
ment necessary  to  the  maintenance  of  a  given  supply. 
Thus,  if  the  supply  of  the  commodity  is  OM  (Fig.  1) 
and  the  cost  of  the  final  or  most  expensive  increment 
is  MN,  then  the  value  of  each  and  every  portion  of 
the  supply  is  determined  by  the  cost  MN  of  the  final 
or  marginal  increment.  Nor  does  Kicardo  confine 
this  proposition  to  the  products  of  land,  for  he  writes : 
"  The  exchangeable  value  of  all  commodities,  whether 
they  be  manufactured,  or  the  produce  of  the  mines, 
or  the  produce  of  the  land,  is  always  regulated  not 
by  the  least  quantity  of  labor  that  will  suffice  for 


24  VALUE  AND  DISTRIBUTION. 

their  production  under  circumstances  highly  favor- 
able and  exclusively  enjoyed  by  those  who  have 
peculiar  facilities  of  production,  but  by  the  greater 
quantity  of  labor  necessarily  bestowed  on  their  pro- 
duction by  those  who  have  no  such  facilities ;  by  those 
who  continue  to  produce  them  under  the  most  un- 
favorable circumstances ;  meaning,  by  the  most  un- 
favorable circumstances,  the  most  unfavorable  under 
which  the  quantity  of  produce  required  renders  it 
necessary  to  carry  on  the  production."  (Bohn  edi- 
tion, p.  50.)  It  is  true  that  the  orthodox  writers 
sometimes  lose  sight  of  this  marginal  concept,  or,  at 
least,  have  failed  to  keep  it  consciously  in  mind,  and 
yet  a  moment's  consideration  will  show  that  the  doc- 
trine of  rent,  upon  which  their  whole  theory  of  dis- 
tribution was  based,  rests  in  last  resort  upon  the 
contention  that  price  is  determined  by  marginal  cost. 
Under  this  contention  the  products  of  the  better  land, 
greater  skill,  or  more  efficient  machines  are  eliminated 
as  exceptions  to  the  law  of  cost,  since  under  this  law 
it  is  the  marginal  cost  that  determines  price. 


CHAPTER    II. 

CONDITIONS  UNDER  WHICH  THE  COST  THEORY 
FAILS. 

IT  has  already  been  shown  that  the  cost  theory 
of  value  rests  upon  the  assumption  that  most  com- 
modities are  freely  reproducible.  It  is  against  this 
assumption  that  the  Austrian  economists  have  di- 
rected their  main  attack,  and  have  insisted  that 
scarcity  values  are  the  rule  rather  than  the  ex- 
ception. It  will  be  necessary,  therefore,  to  examine 
with  some  care  the  argument  by  which  these  latter 
writers  support  this  contention.  One  of  the  best 
statements  of  their  case  is  found  in  that  part  of 
Bohm-Bawerk's  "Capital  and  Interest^  which  is  de- 
voted to  the  refutation  of  the  "  Exploitation  Theory 
of  Interest." 

I.    THE  CONTENTION  OF  THE  AUSTRIAN  ECONOMISTS. 

7.  Exceptions  admitted  by  Ricardo. — On  page 
384  of  "  Capital  and  Interest"  Ricardo  is  quoted  as 
admitting  that  rare  statues  and  pictures,  scarce  books 
and  coins,  and  wines  of  a  peculiar  quality  are  ex- 
ceptions to  the  law  of  cost ;  so,  too,  all  products  of  the 
more  fertile  or  more  favorably  situated  land. 

Ricardo  is  also  quoted  as  admitting  that  the  law 
of  labor  cost  fails  where  capital  is  employed.  He 
writes :  "  The  principle  that  the  quantity  of  labor 

25 


26  VALUE  AND  DISTRIBUTION. 

employed  in  the  production  of  goods  regulates  their 
relative  value  suffers  a  considerable  modification  by 
the  employment  of  machinery  and  other  fixed  and 
durable  capital."  (Chap.  L,  Sees.  4  and  5,  "  Prin- 
ciples.") 

8.  Additional  Exceptions. — To  this  admitted  list 
of  exceptions  Bohm-Bawerk  adds  all  goods  pro- 
duced under  the  protection  of  a  patent,  coypright,  or 
tariff4,  and  then,  as  though  this  list  of  exceptions  was 
not  sufficient,  Bohm-Bawerk  calls  attention  to  the 
fact  that  even  those  goods  which  are  ordinarily  re- 
garded as  freely  reproducible  are  only  so  for  the 
brief  interval  during  which  their  price  is  at  the 
normal  point.  At  all  other  times  or  during  their 
fluctuations  on  either  side  of  this  normal  point  their 
price  is  determined  under  monopoly  conditions.* 

*  Much  confusion  has  arisen  in  the  use  of  the  phrase  free 
competition.  Thus,  it  is  held  by  many  that  free  competition 
prevails  wherever  there  is  no  legal  or  other  external  restric- 
tions on  trade.  It  is  manifest,  however,  that  quite  inde- 
pendent of  such  external  restrictions  there  may  be  an  inter- 
ference with  the  freedom  of  competition.  It  will  hardly  be 
claimed  that  a  handicapped  man  is  competing  freely,  or  that 
the  lame  and  the  halt  compete  freely  with  those  who  are  fleet 
of  foot,  or,  again,  that  the  ignorant  and  the  weak  compete 
freely  with  the  cunning  and  the  powerful.  What,  then,  do 
we  mean  by  free  competition  ?  If  we  take  the  case  of  any 
pronounced  monopoly  good,  we  find  that  its  price  varies  more 
or  less  widely  from  the  normal  price.  From  this  we  are  led 
to  conclude  that  any  good  whose  price  varies  from  the  normal 
is  a  monopoly  or  scarcity  good,  whether  the  variation  is 


CONDITIONS  UNDER  WHICH  THE  COST  THEORY  FAILS.     27 

II.    CASES  IN  WHICH  THE  CONTENTION  OF   THE  AUSTRIANS 

FAILS. 

9.  Marginal  Cost  Theory  holds  for  Products  of 
Better  Land,  etc. — So  far  as  the  products  of  better 
land,  greater  skill,  or  more  efficient  machines  are 
concerned,  the  case  against  the  cost  theory  fails  the 
moment  that  it  is  recognized  that  it  is  marginal  cost 
that  determines  value.      Ricardo  in  admitting  that 
the  products  of  the  better  land  are  exceptions  to  the 
law  of  cost  lost  sight  of  the  fact  that  it  is  marginal 
cost  that  determines  price. 

10.  Marginal  Cost  Theory  holds  for  Products  of 
Fixed  Capital. — While  the  employment  of  machinery 
or  other  fixed  capital  tells  very  seriously  against  a 
labor  theory  of  value,  it   does  not  necessarily  tell 
against  a  cost  theory  of  value  if  it  is  admitted  that 
abstinence  is  a  disutility  or  cost.     Ricardo's  state- 
ment of  the  case  is  certainly  open  to  this  interpreta- 
tion.    He  writes  :  "  Mr.  Mai  thus  seems  to  think  that 

large  or  small,  or  is  maintained  for  a  long  or  short  interval. 
It  follows  from  this  that  so-called  freely  reproducible  goods 
are  in  reality  scarcity  goods,  except  during  the  interval  that 
their  price  is  at  the  normal  point.  Here,  then,  is  the  ultimate 
test  of  free  competition, — the  existence  of  normal  price,  or 
the  existence  of  those  conditions  in  which  marginal  utility 
and  marginal  disutility  are  equal.  Any  departure  from  the 
normal  or  any  failure  in  the  equating  of  utility  and  disutility 
implies  the  existence  of  a  marginal  surplus;  and  the  exist- 
ence of  such  a  surplus  indicates  that  there  is  some  interference 
with  the  freedom  of  competition. 


28  VALUE  AND  DISTRIBUTION. 

it  is  part  of  my  doctrine  that  the  cost  and  the  value 
of  a  thing  should  be  the  same ;  it  is,  if  he  means  by 
cost,  cost  of  production  including  profits/'* 

III.    CASES  IN  WHICH  THE  CONTENTION  OF  THE  AUSTRIANS 
MAY  BE  SUSTAINED. 

11.  Patents,  Tariffs,  etc. — In  a  more  recent  publi- 
cation f  Bohm-Bawerk  seems  to  have  realized  the 
weakness  of  his  argument  upon  the  two  points  just 
mentioned  (goods  produced  by  means  of  fixed  capital 
or  on  the  more  fertile  lands,  etc.).  In  his  restate- 
ment of  the  case  against  the  cost  theory  he  confines 
himself  to  those  instances  where  the  freedom  of  com- 
petition is  interfered  with  by  patents,  tariff  laws,  etc. 
He  writes  :  "  There  are  at  the  present  time  very  few 
products  in  which  some  patented  machine  or  process 
or  some  import  duty  on  raw  or  auxiliary  material 
does  not  play  a  part." 

In  other  words,  he  contends,  and  rightly,  that 
scarcity  goods  are  the  rule ;  that  competition  at  the 
margin  is  frequently  interfered  with  by  patent,  im- 
port duty,  etc. ;  that  non-competing  groups  among 
producers  do  exist ;  that  the  marginal  producer  fre- 
quently secures  a  surplus  above  his  cost,  and,  hence, 
that  even  marginal  disutility  must  fail  as  the  ulti- 

*  Eicardo  undoubtedly  uses  the  term  profits  in  a  somewhat 
confused  way ;  but  that  it  here  includes  interest  there  can 
be  little  doubt. 

f  Annals  of  American  Academy,  September,  1894,  p.  55. 


CONDITIONS  UNDER  WHICH  THE  COST  THEORY  FAILS.     29 

mate  standard  of  value.  Bohm-Bawerk  does  not 
state  the  case  in  just  this  way,  but  the  most  cursory 
examination  of  his  article  on  "  The  Ultimate  Stand- 
ard of  Value"  will  show  that  in  this  later  contribu- 
tion he  ignores  all  portions  of  the  product  that  are 
produced  under  specially  advantageous  circumstances, 
and  confines  himself  to  showing  the  frequent  occur- 
rence of  those  monopoly  or  scarcity  goods  in  the  pro- 
duction of  which  the  marginal  producer  secures  a 
surplus  over  and  above  all  cost,  either  in  labor  or 
abstinence.  It  is  important  that  this  point  in  the 
argument  should  be  clearly  apprehended,  for  in 
another  chapter  I  shall  endeavor  to  show  that  the 
marginal  utility  theory  fails  for  much  the  same 
reason, — to  wit,  that  in  many  instances  the  marginal 
consumer  secures  a  surplus. 


CHAPTER    III. 

THE  UTILITY  THEORY  OF  VALUE. 

I.   THE  EARLIER  UTILITY  THEORY. 

THE  first  attempt  to  formulate  a  theory  of  value 
of  which  we  have  any  record  resulted,  as  we  have 
seen,  in  a  Cost  Theory  of  Value.  It  is,  however, 
more  than  probable  that  the  first  explanation  that 
suggested  itself  was  that  things  are  valuable  because 
they  are  useful.  The  utility  here  in  mind  was  not, 
however,  the  precise  modern  concept  of  marginal  util- 
ity, but  a  more  or  less  vague  and  indefinite  concept 
of  utility  like  the  earlier  concept  of  cost. 

12.  The  Failure  of  the  Earlier  Utility  Theory  to 
explain  the  Paradoxes  of  Value. — The  moment  an 
attempt  is  made  to  apply  this  Earlier  Utility  Theory 
to  the  several  paradoxes  of  value  its  defects  become 
manifest.  It  fails  completely  to  explain  why  such 
useful  things  as  air  and  water  are  valueless ;  why  gold 
is  more  valuable  than  the  more  useful  commodity 
iron;  or  why  the  Dutch  East  India  Company  de- 
stroyed a  portion  of  its  crops  when  they  were  ex- 
ceptionally large.  It  was  doubtless  this  failure  of 
the  earlier  utility  theory  of  value  that  compelled 
men  to  have  recourse  to  the  cost  theory,  in  which 
they  found  a  more  or  less  satisfactory  explanation  of 
these  paradoxes. 


THE  UTILITY  THEORY  OF  VALUE.  31 

The  modern  advocates  of  the  utility  theory  of 
value  hold  that  this  earlier  abandonment  of  the  util- 
ity theory  was  premature,  and  that  under  the  recon- 
structed form  of  the  Marginal  Utility  Theory  of 
Value  we  have  an  entirely  satisfactory  explanation 
of  the  general  phenomena  of  value  and  of  the  several 
paradoxes  that  proved  so  fatal  to  the  earlier  statement 
of  the  utility  theory. 

II.     THE  MARGINAL  UTILITY  THEORY  OF  VALUE, 

That  value  and  price  depend  upon  demand  and 
supply  has  long  been  recognized  as  a  truism.  Again, 
it  was  recognized  that  the  value  of  a  commodity 
cannot  be  determined  unless  we  know  the  amount  of 
the  commodity  offered  for  sale.  But  it  was  not  until 
the  promulgation  of  the  marginal  utility  theory  of 
value  that  this  mutual  interdependence  of  supply, 
demand,  and  value  was  apprehended  in  an  entirely 
clear  and  definite  way. 

The  Theory  of  Marginal  Utility  is  based  upon  the 
familiar  experience  that  pleasures  when  repeated  de- 
crease in  intensity.  Hence  if  there  is  but  one  loaf 
of  bread  between  a  man  and  starvation  he  will,  of 
course,  value  it  very  highly.  But  if  he  has  a  hun- 
dred loaves  he  will  not  value  bread  so  highly.  In 
this  case  the  value  of  the  bread  will  be  fixed  by  the 
pleasure,  satisfaction,  or  utility  dependent  upon  the 
possession  of  the  hundredth  loaf.  If  the  man  has 
but  fifty  loaves,  the  value  of  the  bread  will  be  de- 
pendent on  the  utility  of  the  fiftieth  loaf;  and  in 


32  VALUE  AND  DISTRIBUTION. 

general  the  value  of  the  bread  will  be  dependent 
upon  the  utility  of  the  last  or  marginal  loaf. 

13.  Gossen  and  his  Work. — The  first  to  formu- 
late the  Marginal  Utility  Theory  of  Value  was  Her- 
man Heinrich  Gossen  in  his  "  Entwickelung  der  Ge- 
setze  des  menschlichen  Verkehrs,  etc.,"  published 
in  1854.  In  his  introduction,  Gossen  declared  that 
he  had  made  as  important  a  discovery  in  the  field  of 
National  Economy  as  Copernicus  had  made  in  the 
domain  of  Astronomy.  As  a  matter  of  fact,  he  did 
give  us  a  fairly  complete  statement  of  the  modern 
theory  of  marginal  utility.  The  book,  however,  was 
received  with  such  scant  courtesy  that  the  author 
withdrew  it  from  the  trade  and  died  a  bitterly  dis- 
appointed man. 

Gossen  starts  out  with  Bentham's  thesis,  that  hap- 
piness or  utility  is  the  ultimate  motive  of  all  human 
action.  Gossen  clearly  recognizes  that  in  the  con- 
sumption  of  a  commodity  there  is  a  more  or  less 
regular  decrease  in  the  pleasure  of  consumption ; 
and  that  if  the  supply  is  large  enough  the  point  of 
satiety  would  ultimately  be  reached.  Again,  an 
early  repetition  of  the  act  of  consumption  would  in- 
volve a  lower  initial  pleasure  and  a  shortening  of  the 
period  of  enjoyment.  Gossen  sees,  too,  that  it  is  the 
marginal  pleasure  or  utility  that  fixes  the  value  of 
the  commodity,  and  holds  that  the  condition  of  ex- 
change of  two  commodities  is  the  equality  of  the 
pleasure  derived  from  the  last  atoms  (letzten  Atoms) 
of  the  two  commodities  exchanged.  Again,  he  holds 


THE  UTILITY  THEORY  OF  VALUE.  33 

that  the  ideal  condition  for  society  as  a  whole  is 
where  commodities  are  so  distributed  among  men 
that  the  last  atom  of  every  commodity  yields  the 
same  amount  of  pleasure.  Gossen's  work  differs  from 
that  of  more  recent  writers  in  that  he  never  loses 
sight  of  the  moral  or  social  aspect  of  the  question. 
Marginal  utility  only  interests  him  as  it  enables  him 
to  formulate  the  conditions  of  human  happiness  or 
the  conditions  of  an  ideal  society.  In  the  develop- 
ment of  his  argument  he  employs  the  same  graphic 
illustrations  that  have  since  become  so  familiar.  He, 
however,  lays  off  units  of  time  on  the  horizontal  axis 
instead  of  units  of  commodity ;  but  as  a  unit  of  com- 
modity is  consumed  in  a  unit  of  time,  the  result  is  the 
same  as  if  a  unit  of  commodity  were  laid  off  on  the 
horizontal  axis.* 


*  The  following  passages  are  italicized  in  Gossen  : 
Der  Mensch  richte  seine  Handlungen  so  ein,  dass  die  Summe 
seines  Lebensgenusses  ein  Grosstes  werde.     (Page  3.) 

1.  Die  Grosse  eines  und  desselben  Genusses  nimmt,  wenn 
wir  mit  Bereitung  des  Genusses  ununterbrochen  fortfahren, 
fortwahrend  ab,  bis  zuletzt  Sattigung  eintritt.     (Page  4.) 

2.  Eine  ahnliche  Abnahme  der  Grosse  des  Genusses  tritt 
ein,  wenn  wir  den  friiher  bereiteten  Genuss  wiederholen,  und 
nicht  bloss,  dass  bei  wiederholter  Bereitung  die  ahnliche  Ab- 
nahme eintritt,  auch  die  Grosse  des  Genusses  bei  seinem  Be- 
ginnen  ist  eine  geringere,  und  die  Dauer,  wahrend  welcher 
etwas   als   Genuss   empfunden  wird,  verkiirzt  sich  bei   der 
Wiederholung,  es  tritt  friiher  Sattigung  ein,  und  beides,  an- 
fangliche  Grosse  sowohl,  wie  Daucr,  vermindern  sich  um  so 
mehr,  je  rascher  die  Wiederholung  erfolgt.     (Page  5.) 

3 


34  VALUE  AND  DISTRIBUTION. 

14.  Jevons,  Walras,  and  Menger. — The  first  recog- 
nition of  the  great  importance  of  Gossen's  work  is 
found  in  the  preface  to  the  second  edition  of  Jevons's 
"  Theory  of  Political  Economy,"  published  in  1879. 
German  economists  seem  to  have  remained  ignorant 
even  of  its  existence  until  their  attention  was  thus 
called  to  its  great  importance.  Jevons  published  his 
first  edition  in  1871,  while  at  about  the  same  time  two 
other  economists,  Walras  and  Menger,  promulgated 
the  same  doctrine.  It  is,  therefore,  most  interest- 
ing to  note  that  the  message  which  in  1854  could  not 
even  secure  a  hearing  is  so  much  in  the  air  in  1871 
that  three  widely  separated  economists,  Jevons,  Wal- 
ras, and  Menger,  gain  fame  in  proclaiming  it.  There 
seems  to  be  but  one  explanation  of  this  phenomenon. 
Gossen  wrote  in  1854  while  economists  were  still  in 
bondage  to  the  fundamental  premise  of  orthodox 

Dor  Tausch  blcibt  fur  A,  wenn  gleiche  Quantitaten  gegen 
einander  vertauscht  werden,  so  lange  vortheilhaft,  bis  der 
Werth  des  letzten  Atoms  bei  beiden  Gegenstanden,  welche  in 
den  Besitz  des  A  gelangen,  gleich  gross  geworden  ist. 

Es  muss  jeder  der  beiden  Gegenstande  nach  dem  Tausche 
unter  A  und  B  der  Art  sich  vertheilt  finden,  dass  das  letzte 
Atom,  welches  jeder  von  einem  jeden  erhalt,  beiden  gleich 
grossen  Werth  schafft.  (Pages  84  and  85.) 

Damit  durch  den  Tausch  ein  Grosstes  von  Werth  entstehe, 
muss  sich  nach  demselben  jeder  einzelne  Gegenstand  unter 
alle  Menschen  so  vertheilt  finden,  dass  das  letzte  Atom, 
welches  jedem  von  einem  jeden  Gegenstande  zufallt,  bei  ihm 
den  gleich  grossen  Genuss  schafft,  wie  das  letzte  Atom  des- 
selben  Gtgeustandes  bei  einem  jeden  andcrn.  (Page  85.) 


THE  UTILITY  THEORY  OF   VALUE.  35 

economics,  that  scarcity  commodities  are  the  excep- 
tion and  freely  reproducible  goods  the  rule.  But  by 
1871  economic  conditions  had  so  changed  that  econo- 
mists were  constrained  to  recognize  the  utter  falsity 
of  this  proposition,  and  so  were  compelled  to  seek  for 
a  theory  of  value  that  would  include  the  case  of 
scarcity  goods. 

The  cause  of  the  failure  of  the  earlier  advocates 
of  the  utility  theory  is  now  manifest.  They  did  not 
even  see  the  real  difficulty  that  confronted  them ; 
did  not  recognize  the  fact  that  in  the  consumption 
of  a  given  commodity  a  number  of  different  utilities 
are  developed.  It  therefore  never  occurred  to  them 
to  ask  the  interesting  question,  Which  of  these 
utilities  is  it  that  determines  the  value  of  the  com- 
modity ?  As  this  is  a  crucial  point  in  the  develop- 
ment of  the  modern  utility  theory,  it  may  be  well 
to  allow  its  advocates  to  state  the  case  in  their  own 
language. 

15.  Bohm-Bawerk's  Statement  of  the  Theory  of 
Marginal  Utility. — After  a  careful  elaboration  of -a 
number  of  concrete  instances,  Bohm-Bawerk  sums 
up :  "  The  case,  then,  stands  as  follows  :  Wants  which 
are  more  important  than  this  '  last'  want  will  not  be 
affected  by  the  loss  of  the  good,  for  their  satisfaction 
is,  as  before,  guaranteed  in  case  of  need  by  the  re- 
placement of  substitutes.*  Nor  will  those  wants  be 

*  This  is  based  upon  the  assumption  that  we  have  a  number 
of  equally  efficient  increments  of  commodity,  say  fifty  loaves 


36  VALUE  AND  DISTRIBUTION. 

affected  which  are  less  important  than  this  '  marginal 
want/  for  they  go  unsatisfied  whether  the  good  is 
there  or  not.  The  only  want  affected  is  the  last  of 
those  that  otherwise  would  be  satisfied :  it  will  be 
satisfied  if  the  good  is  there ;  it  will  not  be  satisfied 
if  it  is  not  there.  It  is  thus  the  dependent  want  we 
were  seeking. 

"Here,  then,  we  have  reached  the  goal  of  the 
present  inquiry  and  may  formulate  it  thus  :  the  value 
of  the  good  is  measured  by  the  importance  of  that 
concrete  want,  or  partial  want,  which  is  least  urgent 
among  the  wants  that  are  met  from  the  available 
stock  of  similar  goods.  What  determines  the  value 
of  a  good,  then,  is  not  its  greatest  utility,  not  its 
average  utility,  but  the  least  utility  which  it,  or  one 
like  it,  might  be  reasonably  employed  in  providing 
under  the  concrete  economical  conditions.  \  To  save 
ourselves  a  repetition  of  this  circumstantial  descrip- 
tion,— which,  nevertheless,  has  to  be  somewhat  cir- 
cumstantial to  be  quite  correct, — we  shall  follow 
Wieser  in  calling  this  least  utility — the  utility  that 
stands  on  the  margin  of  the  economically  permissible 
— the  economic  Marginal  Utility  of  the  good.  The 
law  which  governs  amount  of  value,  then,  may  be 
put  in  the  following  very  simple  formula :  The  value 
of  a  good  is  determined  by  the  amount  of  its  mar- 
ginal utility. 

of  bread.     In  this  case  the  loss  of  one  loaf  would  lead  to  the 
substitution  of  another  equally  efficient  loaf. 


THE  UTILITY  THEORY  OF  VALUE. 


37 


"  This  proposition  is  the  keystone  of  our  theory  of 
value.  But  it  is  more.  In  my  opinion  it  is  the  mas- 
ter-key to  the  action  of  practical  economic  men  with 
regard  to  goods.  In  the  simplest  cases,  as  in  all 
the  tangle  and  complication  which  our  present  varied 
economic  life  has  created,  we  find  men  valuing  the 
goods  with  which  they  have  to  deal  by  the  marginal 
utility  of  these  goods,  and  dealing  with  them  accord- 
ing to  the  result  of  this  valuation.  And  to  this  ex- 
tent the  doctrine  of  marginal  utility  is  not  only  the 
keystone  of  the  theory  of  value,  but,  as  affording  the 
explanation  of  all  economical  transactions,  it  is  the 
keystone  of  all  economical  theory."  * 

16.  Graphic  Illustration  of  the  Marginal  Utility 
Theory. — This  theory  finds  graphic  illustration  in 
Fig.  2.     The  amount  of  com- 
modity is  here  laid  off  along 
the  line  OM.     The  utility  of 
successive  increments  of  com- 
modity is  represented  by  lines 
at  right  angles  to  OM.    Thus, 
if   the  amount   of   the   com- 
modity is  represented  by  the 
length  of  the  line  OA,  then 
the  utility  of  the  last  incre-  o 
ment  of  the   supply   of  the 
commodity  is  represented  by  the  length  of  the  line 
AU.     But  if  the  amount  of  the  commodity  is  repre- 


Fro.  2. 


*  Positive  Theory  of  Capital,  pp.  148,  149. 


38  VALUE  AND  DISTRIBUTION. 

sented  by  the  length  of  OM,  the  utility  of  the  last 
increment  of  the  supply  is  represented  by  the  length 
of  MN.  As  the  utility  decreases  with  each  succes- 
sive increment  of  the  supply  of  the  commodity,  the 
line  of  utility,  YUN,  is  a  descending  line.  Again, 
according  to  the  marginal  utility  theory,  the  value  of 
the  whole  commodity  is  determined  by  the  utility  of 
the  last  increment  of  the  supply  of  the  commodity, 
Thus,  if  the  amount  of  commodity  is  OA,  the  mar- 
ginal utility  or  value  of  the  commodity  is  AU ;  if, 
however,  the  amount  of  commodity  is  OM,  then  the 
marginal  utility  or  value  of  the  commodity  is  MN. 

(a)  VALUE  PER  UNIT  VERSUS  TOTAL  VALUE. — It 
should  be  noticed  that  under  the  above  assumptions 
AU  and  MN  represent  severally  the  marginal  utility 
or  value  per  unit  of  the  commodity.     There  is,  how- 
ever, another  concept  of  value  with  which  it  is  some- 
times necessary  to  deal,  and  which  must  be  care- 
fully distinguished  from  the  concept  of  value  per 
unit.     The  concept  here  referred  to  is  that  of  total 
value,  which  is  represented  by  the  areas  of  the  rec- 
tangles OAUF  and  OMNE,  or  by  quantity  of  com- 
modity multiplied  by  value  per  unit. 

(b)  TOTAL  VALUE  VERSUS  TOTAL  UTILITY. — There 
is  still  another  concept  that  must  be  carefully  dis- 
tinguished from  total  value.     We  here  refer  to  the 
concept  of  total  utility,  which  is  represented  by  the 
area  OAUY  if  the  margin  is  at  A  and  by  the  area 
OMNY  if  the  margin  is  at  M.     It  is  here  mani- 
fest that  total  utility  and  total  value  are  essentially 


THE  UTILITY  THEORY  OF  VALUE.  39 

different  concepts,  total   utility  exceeding   and   in- 
cluding total  value. 

17.  The  Marginal  Utility  Theory  and  the  Para- 
doxes of  Value. — (a)  WHY  ARE  AIR  AND  WATER 
VALUELESS,  AND  WHY  is  IRON  OF  LESS  VALUE  THAN 
GOLD  ? — To  both  of  these  questions  the  advocates  of 
marginal  utility  find  a  ready  answer.  We  cannot 
do  better  than  to  quote  again  from  Bohm-Bawerk : 
"  Here,  then,  we  have  an  entirely  natural  explana- 
tion of  the  phenomenon  which  originally  struck  us 
as  so  surprising,  that  comparatively  '  useless'  things, 
such  as  pearls  arid  diamonds,  have  so  high  a  value, 
while  infinitely  more  '  useful'  things,  like  bread  and 
iron,  have  a  far  less  value,  and  water  and  air  no 
value  at  all.  Pearls  and  diamonds  are  to  be  had  in 
such  small  quantities  that  the  relative  want  is  only 
satisfied  to  a  trifling  extent,  and  the  point  of  mar- 
ginal utility  which  the  satisfaction  reaches  stands 
relatively  high.  Happily  for  us,  on  the  other  hand, 
bread  and  iron,  water  and  light,  are,  as  a  rule,  to  be 
had  in  such  quantities  that  the  satisfaction  of  all  the 
more  important  wants  which  depend  on  them  is  as- 
sured. Only  very  trifling  concrete  wants,  or  no 
wants  at  all,  are  dependent,  for  instance,  on  the  com- 
mand over  a  piece  of  bread  or  a  glass  of  water.  It 
is,  of  course,  true  that  in  abnormal  circumstances — 
as,  for  instance,  in  besieged  towns,  or  in  desert 
journeys,  where  water  and  food  is  scarce,  and  small 
stores  only  suffice  to  meet  the  most  urgent  concrete 
wants  of  meat  and  drink — the  marginal  utility  flies 


40  VALUE  AND  DISTRIBUTION. 

up.  According  to  our  principles  the  value  of  these 
goods,  otherwise  of  so  little  account,  must  rise  also, 
and  the  inference  finds  ample  empirical  confirmation 
in  the  enormous  prices  paid  in  such  circumstances 
for  the  most  wretched  means  of  subsistence.  Thus, 
those  very  facts  which,  at  first  sight,  seemed  to  con- 
tradict our  theory  that  the  amount  of  value  is  de- 
pendent upon  the  amount  of  utility,  on  closer  exam- 
ination afford  a  striking  confirmation  of  it."* 

There  is,  however,  another  phase  of  this  paradox 
that  may  need  some  further  explanation.  We  have 
seen  in  what  way  and  why  gold  may  have  a  greater 
value  than  iron,  but  we  have  not  explained  just  how 
and  why  we  continue  to  think  of  iron  as  the  more 
useful  metal.  That  is,  we  have  not  brought  this  fact 
into  accord  with  our  utility  theory  of  value.  Put  in 
a  brief  way,  the  explanation  is  found  in  the  fact  that 
a  great  reduction  in  our  supply  of  so-called  neces- 
saries might  raise  their  marginal  utility  to  almost  any 
point  or  degree  of  importance, — even  to  the  impor- 
tance of  maintaining  life  itself.  On  the  other  hand, 
no  reduction  in  the  supply  of  commodities  that  are 
not  necessary  for  the  maintenance  of  life  could  ever 
reach  the  same  degree  of  importance  or  the  same 
marginal  utility.  Bohm-Bawerk's  more  elaborate 
discussion  of  this  question  will  be  found  on  page  144 
of  "  Positive  Theory  of  Capital." 

(b)  WHY  DID  THE  DUTCH  EAST  INDIA  COMPANY 

*  Positive  Theory  of  Capital,  pp.  152,  153. 


THE  UTILITY  THEORY  OF  VALUE. 


41 


3. 


DESTROY  A  PORTION  OF  THEIR  CROPS  ?  This  paradox 
is  readily  explained  in  terms  of  the  marginal  utility 
theory  of  value.  Let  us 
assume  (Fig.  3)  that  our 
utility  curve  takes  a  sud- 
den change  in  direction 
at  the  point  U,  or  that 
an  increase  in  the  sup- 
ply of  commodity  be- 
yond OA  occasions  a 
much  more  rapid  de- 
cline in  marginal  utility 

than  was  occasioned  by  

i     .  /      6  A   M 

an     equal    increase    in 

commodity  before  that  point  was  reached.  The 
result  manifestly  would  be  that,  despite  the  increase, 
AM,  in  the  quantity  of  commodity,  the  total  value 
has  decreased  from  the  area  OAUF  to  the  area 
OMNE.  Under  such  circumstances  a  seller  con- 
trolling a  large  part  of  the  supply  might  profitably 
destroy  a  portion  of  his  commodity,  since  he  would 
thereby  increase  not  only  the  marginal  utility  but 
the  total  value  as  well.  From  this,  it  is  clear  that 
the  Marginal  Utility  Theory  is  even  more  efficient 
than  the  Cost  Theory  in  resolving  the  several  para- 
doxes of  value. 


CHAPTEK    IV. 

CONDITIONS  UNDER  WHICH  THE  UTILITY  THEORY 

FAILS. 

IT  has  already  been  shown  that  the  Earlier  Utility 
Theory  failed  to  explain  the  several  paradoxes  of 
value.  On  the  other  hand,  it  has  been  seen  how 
complete  and  satisfactory  are  the  explanations  offered 
by  the  Marginal  Utility  Theory.  It  remains  to  be 
shown  that  even  this  theory  does  not  afford  an  en- 
tirely satisfactory  solution  of  the  ever  interesting 
problem  of  price. 

Towards  the  close  of  his  earlier  argument  Bohm- 
Bawerk  writes  :  "  If — what  is  practically  inconceiva- 
ble— production  were  carried  on  in  ideal  circum- 
stances, unfettered  by  limitations  of  space  and  time, 
with  no  friction,  with  the  most  perfect  knowledge  of 
the  position  of  human  wants  requiring  satisfaction 
and  without  any  disturbing  changes  of  wants,  stocks, 
or  technique,  then  the  original  productive  powers 
would,  with  ideal  and  mathematical  exactitude,  be 
invested  in  the  most  remunerative  employments,  and 
the  law  of  costs,  so  far  as  we  can  speak  of  such  a  law, 
would  hold  in  ideal  completeness."  * 

In  other  words,  it  is  here  maintained  that  the  law 
of  cost  is  only  true  under  the  assumption  of  an  ideal 

*  Positive  Theory  of  Capital,  p.  233. 
42 


CONDITIONS  UNDER  WHICH  UTILITY  THEORY  FAILS.      43 

condition  of  free  competition  among  producers.  It 
is  the  purpose  of  the  present  chapter  to  show  that 
the  law  of  marginal  utility  is  likewise  based  upon 
the  assumption  of  an  ideal  condition  of  free  com- 
petition. 

It  will  be  remembered,  however,  that  the  Austrian 
economists  called  attention  to  the  fact  that  Bicardo 
admitted  the  failure  of  the  Cost  Theory  in  the  case 
of  rare  wine,  paintings  by  the  old  masters,  etc.  (See 
page  25.)  It  may,  therefore,  be  well  to  note  that 
they  themselves  have  made  even  more  serious  admis- 
sions as  against  their  own  theory. 

18.  Bohm-Bawerk' s  admitted  Exceptions  to  the 
Law  of  Marginal  Utility.— On  page  217  of  "The 
Positive  Theory  of  Capital,"  Bohm-Bawerk  admits 
that  marginal  utility  fails,  at  least  in  exactness,  in 
the  case  of  money  and  labor.  May  it  not,  then, 
fairly  be  urged  that  while  "  there  are  at  the  present 
time  very  few  products  in  which  some  patented  ma- 
chine or  process  or  some  import  duty  on  raw  or  aux- 
iliary material  does  not  play  a  part,"  yet  it  is  equally 
true  that  there  are  few  products  in  which  varia- 
tions in  the  value  of  money  and  labor  do  not  play 
a  part  ? 

Again,  in  his  discussion  of  the  three  possible 
forms  of  exchange,  Bohm-Bawerk  writes,  "In  iso- 
lated exchange — exchange  between  one  buyer  and 
one  seller — the  price  is  determined  somewhere  be- 
tween the  subjective  valuation  of  the  commodity  by 
the  buyer  as  upper  limit  and  the  subjective  valuation 


44  VALUE  AND   DISTRIBUTION. 

of  the  seller  as  lower  limit."*  Or  he  admits  that 
in  all  such  cases  the  marginal  utility  of  the  good  to 
the  buyer  and  seller  only  establishes  limits  within 
which  the  price  may  vary.  In  other  words,  mar- 
ginal utility  fails  in  exactness  in  all  cases  of  isolated 
exchange. 

Then,  too,  of  the  case  of  one-sided  competition,  he 
writes :  "  First.  The  competition  of  buyers  has  the 
effect  of  narrowing  the  sphere  within  which  price  is 
determined,  and  narrowing  it  in  the  upward  direc- 
tion. Second.  One-sided  competition  of  sellers  forms 
the  exact  converse  of  the  foregoing.  Entirely  analo- 
gous tendencies  lead  to  entirely  analogous  results — 
only  in  an  opposite  direction. "f  Here  we  again 
have  an  admission  that  there  is  quite  a  sphere  within 
which  the  price  may  vary,  or  an  admission  that 
marginal  utility  fails  in  exactness  in  all  cases  of  one- 
sided competition. 

Lastly,  in  his  discussion  of  two-sided  competition, 
he  sums  up  as  follows  :  "  If,  finally,  we  substitute  the 
short  and  significant  name  of  '  Marginal  Pairs'  for 
the  detailed  description  of  the  four  parties  whose 
competition  determines  the  price,  we  get  this  very 
simple  formula :  The  market  price  is  limited  and 
determined  by  the  subjective  valuation  of  the  two 
Marginal  Pairs."  J  In  other  words,  Bohm-Bawerk 


*  Positive  Theory  of  Capital,  p.  199. 
f  Ibid.,  p.  201. 
J  Ibid.,  p.  209. 


CONDITIONS  UNDER  WHICH  UTILITY  THEORY  FAILS.     45 

here  admits  that  in  all  three  forms  of  exchange  the 
valuations  of  buyers  and  sellers  merely  establish 
limits  within  which  the  price  may  vary.  Again,  he 
writes :  "  According  as  in  the  conduct  of  the  trans- 
action the  buyer  or  seller  shows  the  greater  dex- 
terity, cunning,  obstinacy,  power  of  persuasion,  or 
such  like,  will  the  price  be  forced  either  to  its  lower 
or  to  its  upper  limit."  Clearly,  then,  the  price  in 
all  three  cases  may  be  determined  at  a  point  which  is 
less  than  the  valuation  of  the  marginal  buyer.  From 
this  it  follows  that  this  last  or  marginal  buyer  secures 
a  surplus,  and  hence  that  marginal  utility  fails  as  an 
exact  determinant  of  price. 

19.  How  Bohm-Bawerk  would  escape  from  the 
Consequences  of  these  Admissions. — It  will  now  be 
interesting  to  inquire  how  Bohm-Bawerk  would  es- 
cape from  a  position  so  fatal  to  the  Marginal  Utility 
Theory.  This  he  endeavors  to  do  in  his  chapter  on 
Price.  The  first  two  forms  of  exchange  are  ignored 
on  the  ground  that  the  bulk  of  the  world's  exchanges 
comes  under  the  head  of  two-sided  competition.  He 
then  devotes  his  attention  to  this  last  form,  and  en- 
deavors, first,  to  eliminate  the  marginal  pair  of  sell- 
ers, and,  second,  to  reduce  the  difference  in  the  valua- 
tions of  the  marginal  pair  of  buyers  to  an  amount 
so  small  that  it  may  safely  be  ignored.  Price  is  then 
determined  by  the  valuation  of  the  last  buyer  or  by 
marginal  utility.  It  will  be  well  to  follow  his  reason- 

*  Positive  Theory  of  Capital,  p.  199. 


46  VALUE  AND   DISTRIBUTION. 

ing  upon  this  point  with  some  care.  (See  "  Positive 
Theory  of  Capital,"  pp.  220,  221.) 

(a)  THE  ELIMINATION  OF  THE  MARGINAL  PAIR  OF 
SELLERS. — Let  us  turn  first  to  that  part  of  his  argu- 
ment in  which  he  seeks  to  eliminate  the  marginal 
pair  of  sellers.  It  is  undoubtedly  true  that  under 
modern  conditions  many  commodities  are  produced 
in  anticipation  of  the  market,  and  "  when  goods  are 
once  produced  and  the  owner  can  do  nothing  with 
them  for  his  own  personal  wants,  they  must,  all  the 
same,  seek  a  market,"  and  the  seller  must. accept 
whatever  price  the  buyer  is  willing  to  pay.  In  other 
words,  the  marginal  utility  of  the  good  to  the  seller 
is  here  so  low  that  it  does  not  enter  into  the  problem, 
the  determination  of  the  price  coming  entirely  from 
the  side  of  the  buyer.  This,  I  take  it,  is  the  reason- 
ing by  which  Bohm-Bawerk  eliminates  the  marginal 
pair  of  sellers.  Nevertheless,  it  may  fairly  be  urged 
that  no  inconsiderable  part  of  many  commodities  is 
still  made  or  produced  to  order,  or  while  more  clothes 
are  now  manufactured  in  anticipation  of  the  market 
than  a  hundred  years  ago,  yet  some  clothes  still  are 
and  probably  ever  will  be  made  to  order.  And  a 
standard  of  price  that  fails  to  determine  the  price  of 
goods  made  to  order  can  hardly  be  accepted  as  a  uni- 
versal standard  of  price. 

The  orthodox  school,  undoubtedly,  had  in  mind 
this  latter  class  of  goods,  while  the  Austrians  have 
called  attention  to  the  fact  that  in  modern  times  the 
tendency  is  to  produce  in  anticipation  of  the  market. 


CONDITIONS  UNDER   WHICH   UTILITY  THEORY   FAILS.      47 

So  long  as  they  urge  tins  fact  to  show  the  failure  of 
the  law  of  cost  I  am  not  here  disposed  to  disagree 
with  them,  but  when  they  rest  their  theory  of  value 
upon  the  assumption  that  gootds  made  to  order  now 
form  so  inconsiderable  a  part  of  the  world's  produc- 
tion that  they  may  safely  be  ignored,  I  am  constrained 
to  part  company  with  them. 

(b)  THE  ELIMINATION  OF  ONE  OF  THE  Two  MAR- 
GINAL BUYERS. — Note  again,  that  Bohin-Bawerk  re- 
stricts the  law  of  marginal  utilky  "  to  prices  actually 
established  within  a  large  and  organized  market." 
He  then  concludes  :  "  If  the  buyers  are  very  numer- 
ous, the  interval  between  the  figures  which  two  suc- 
cessive buyers  put  on  their  valuation  is  so  small  that 
the  zone  limited  by  the  figure  of  the  last  buyer  and 
that  of  the  first  unsuccessful  competitor  is  narrowed 
almost  to  a  point.  And  so  far  as  this  is  the  case  it 
may  be  asserted,  with  sufficient  exactness,  of  the 
economic  exchange  which  goes  on  in  large  markets, 
that  the  market  price  is  determined  by  the  Valua- 
tion of  the  Last  Buyer/'  In  other  words,  he  practi- 
cally assumes  that  the  bulk  of  the  world's  goods  is 
sold  in  markets  that  are  large  and  well  organized ;  a 
contention  not  easily  maintained,  especially  in  re- 
gard to  retail  markets  or  those  that  touch  the  con- 
sumer most  nearly.  In  any  event,  there  are  many 
goods  sold  in  markets  that  are  neither  large  nor  well 
organized,  and  under  the  above  assumption  these 
goods  are  clearly  excluded  from  the  operation  of  the 
law  of  marginal  utility. 


48  VALUE  AND   DISTRIBUTION. 

To  sum  up,  then,  we  find,  by  the  admissions  of 
Bohm-Bawerk  himself,  that  the  law  of  marginal  utility 
fails  in  exactness,  not  only  for  money  and  labor,  but 
also  for  all  cases  of  isolated  exchange,  for  all  cases  of 
one-sided  competition,  for  all  goods  made  or  produced 
to  order,  and  for  all  goods  sold  in  markets  that  are  not 
large  and  well  organized.  In  other  words,  we  find  a 
list  of  admitted  exceptions  to  the  Law  of  Marginal 
Utility  that  is  at  least  as  formidable  as  any  that  can 
be  urged  against  the  Law  of  Cost. 

20.  The  Defect  in  the  Analysis  of  the  Austrian 
Economists. — In  Chapter  II.  the  failure  of  the  cost 
theory  was  shown  not  only  by  the  many  serious  and 
admitted  exceptions  to  this  theory,  but  also  by  the 
fact  that  in  last  resort  it  rests  upon  the  unwarranted 
assumption  of  ideal  free  competition  among  pro- 
ducers. In  the  present  chapter  I  have  thus  far 
shown  the  failure  of  the  Marginal  Utility  Theory  by 
an  equally  serious  list  of  admitted  exceptions.  It 
now  remains  for  me  to  show  that  the  Marginal  Utility 
Theory  rests  upon  a  like  unwarranted  assumption  of 
free  competition. 

(a)  THE  MARGINAL  UTILITY  THEORY  RESTS  UPON 
THE  UNWARRANTED  ASSUMPTION  OF  FREE  COMPE- 
TITION AMONG  CONSUMERS. — We  have  just  seen  that 
if  the  buyers  are  very  numerous  the  difference  be- 
tween the  valuations  of  the  "last  buyer  and  the 
first  unsuccessful  competitor  is  narrowed  almost  to  a 
point."  We  have  now  to  inquire  what  happens  when 
this  difference  in  valuation  is  not  narrowed  to  a  point. 


CONDITIONS  UNDER  WHICH   UTILITY  THEORY  FAILS.      49 

It  is  manifest  that  under  such  circumstances  there 
might  be  quite  an  appreciable  decline  in  the  price  be- 
fore the  first  unsuccessful  buyer  would  really  begin 
to  compete  for  the  commodity  in  question.  In  other 
words,  the  existence  of  an  appreciable  difference  be- 
tween the  valuation  of  the  last  buyer  and  the  first 
unsuccessful  competitor  implies  or  is  the  result  of 
some  failure  in  the  freedom  of  competition  among 
buyers  or  consumers. 

Now,  it  may  be  urged  by  the  advocates  of  marginal 
utility  that  under  the  assumption  of  a  "large  and 
organized  market"  the  probability  of  such  a  failure 
in  the  freedom  of  competition  is  very  remote ;  that 
under  this  assumption  price  will  vary  continuously 
with  the  supply  of  the  commodity  and  buyers  will 
be  able  to  range  themselves  in  a  differential  series, 
etc.  I  will  not  combat  this  contention  at  this  point 
in  the  argument,  but  would  call  attention  to  the  un- 
warranted assumption  upon  which  this  contention 
rests.  For  if  the  existence  of  an  appreciable  difference 
between  the  valuations  of  the  two  marginal  buyers  im- 
plies the  existence  of  some  interference  with  the  free- 
dom of  competition  among  buyers  or  consumers,  then 
the  absence  of  such  difference  between  their  valuations 
implies  the  existence  of  ideal  free  competition  among 
buyers  or  consumers.  In  other  words,  the  Marginal 
Utility  Theory  rests  in  last  resort  upon  the  unwar- 
ranted assumption  of  ideal  free  competition  among 
consumers  just  as  the  Marginal  Cost  Theory  rests  upon 


50  VALUE  AND  DISTRIBUTION. 

the  like  unwarranted  assumption  of  ideal  free  compe- 
tition among  producers. 

(b)  MARGINAL  UTILITY  THEORY  FAILS  BECAUSE 
THE  MARGINAL  CONSUMER  FREQUENTLY  SECURES  A 
SURPLUS. — Let  us  now  return  to  the  contention  that 
where  the  buyers  are  numerous  the  difference  be- 
tween the  valuations  of  the  marginal  pair  of  buyers 
is  narrowed  almost  to  a  point.  This,  as  we  have  just 
seen,  rests  upon  an  altogether  unwarranted  assump- 
tion. Though  there  were  a  million  buyers,  how  can 
it  be  said  that  the  valuation  of  the  million  and 
first  will  necessarily  vary  by  a  differential  from  the 
millionth  buyer?  Why  may  there  not  be  at  any 
point  a  non-competing  group  or  an  interference  with 
the  freedom  of  competition  among  buyers  as  well  as 
among  sellers,  among  consumers  as  well  as  among 
producers  ?  If  such  an  interference  with  the  freedom 
of  competition  does  arise,  then  the  price  may  be  fixed 
at  a  point  "  which  is  somewhat  less  than  the  valuation 
of  the  thousandth  buyer  and  somewhat  higher  than 
the  valuation  of  the  thousand  and  first."  Under 
these  conditions  the  utility  of  the  commodity  to  the 
actual  marginal  buyer  would  be  greater  than  the 
price  paid.  He  would  therefore  secure  a  marginal 
surplus  and  marginal  utility  would  here  fail  as  the 
standard  of  price,  for  the  same  reason  that  it  fails  in 
the  case  of  isolated  exchange,  one-sided  competition, 
and  for  all  goods  that  are  sold  in  markets  that  are 
not  large  and  well  organized.  In  other  words,  mar- 
ginal utility  fails  because  the  marginal  consumer  fre- 


CONDITIONS  UNDER  WHICH  UTILITY  THEORY  FAILS.      51 

quently  secures  a  surplus^  just  as  marginal  cost  fails 
because  the  marginal  producer  frequently  secures  a 
surplus. 

That  the  introduction  of  the  concept  of  consump- 
tion as  varying  by  differential  increments  has  been  of 
advantage  to  economic  theory  none  will  deny;  and 
yet  it  is  questionable  whether  this  concept  has  not 
been  as  fruitful  of  errors  as  any  yet  introduced  into 
the  science.  For  its  advocates  fail  to  see,  or  at  least 
to  keep  in  mind,  the  assumption  upon  which  it  rests, 
— namely,  an  ideal  condition  of  free  competition 
among  consumers.  So  long  as  we  do  not  lose  sight 
of  this,  the  concept  of  differential  increments  may 
be  useful  for  certain  theoretic  purposes.  But  when 
we  lose  sight  of  the  assumption  that  lies  back  of  the 
Marginal  Utility  Theory,  and  hold  that  free  compe- 
tition on  the  side  of  the  consumer  exists  generally  in 
the  economic  world,  confusion  must  result. 

There  is  probably  no  commodity  whose  market 
satisfies  the  ideal  conditions  more  closely  than  that 
of  wheat,  and  yet  it  may  very  readily  have  hap- 
pened that  in  a  recent  decline  in  the  price  of  wheat 
there  may  have  been  quite  an  appreciable  break  be- 
tween the  point  at  which  the  price  corresponded  to 
the  marginal  utility  of  wheat  for  the  feeding  of 
human  beings  and  the  point  where  it  became  profit- 
able to  feed  it  to  hogs.  Again,  while  at  certain 
prices  the  sugar  market  may  be  very  elastic,  yet  a 
point  might  readily  be  reached  where  all  our  present 
uses  or  desire  for  sugar  would  be  satiated.  In  this 


52  VALUE  AND  DISTRIBUTION. 

case  quite  an  appreciable  fall  in  price  might  fail  to 
increase  its  consumption.  This  is  practically  the 
case  with  salt  at  present  prices.  So,  too,  with  pep- 
per, matches,  and  a  number  of  other  commodities. 
It  hardly  need  be  again  urged  that  this  is  generally 
true  of  all  cases  of  isolated  exchange  of  one-sided 
competition,  and  of  all  goods  whose  market  is  neither 
large  nor  well  organized.  As  a  matter  of  fact,  the 
market  for  these,  as  for  all  other  commodities,  is 
only  perfectly  elastic  or  satisfies  the  conditions  as- 
sumed by  the  Austrian  economists  so  long  as  the 
price  remains  within  more  or  less  definite  limits.  It, 
however,  loses  this  elasticity  or  fails  to  satisfy  these 
conditions  when  the  price  passes  either  the  upper  or 
lower  of  these  limits. 

That  the  orthodox  school  practically  assumed  the 
existence  of  an  ideal  condition  of  free  competition 
among  producers  cannot  be  denied.  But,  as  we 
have  endeavored  to  show,  the  advocates  of  marginal 
utility  have  assumed  a  like  ideal  condition  of  free 
competition,  or  have  assumed  that  there  are  no  non- 
competing  groups  among  consumers.  That  such  an 
ideal  condition  of  free  competition,  either  on  the  side 
of  production  or  of  consumption,  exists  generally  in 
the  markets  of  the  world,  or  is  permanently  estab- 
lished in  the  market  of  ariy  one  commodity,  may 
well  be  questioned.  It  may  be  that  an  interference 
with  the  freedom  of  competition  is  much  more  fre- 
quent among  producers  than  among  consumers.  And 
this  because  of  the  greater  facility  for  combining 


CONDITIONS  UNDER   WHICH   UTILITY  THEORY   FAILS.      £3 

which  the  producers  enjoy «  But  be  that  as  it  may,  it 
still  remains  true  that  a  theory  of  price  which  rests 
upon  the  assumption  of  free  competition  among  con- 
sumers is  without  sufficient  warrant  and  can  hardly 
be  said  to  furnish  us  with  an  ultimate  standard  of 
price. 


CHAPTEE    V. 

THE  MONOPOLY  THEORY  OP  PRICE. 

IT  is  the  contention  of  the  present  writer  that 
while  value  is  determined  by  marginal  utility  price 
is  never  so  determined  save  in  the  case  of  normal 
value  and  price.  In  the  case  of  scarcity  goods,  or 
the  great  bulk  of  the  world's  commodities,  the  mar- 
ginal utility  of  the  good  to  the  consumer  and  its 
marginal  utility  to  the  producer  only  establish  limits 
within  which  the  price  may  vary.  Its  final  loca- 
tion depends  upon  the  relative  monopoly  strength 
of  consumer  and  producer,  and  so  is  incapable 
of  any  exact  determination.  This  in  brief  is  the 
Monopoly  Theory  of  Price  which  will  here  be  pro- 
posed.* 

*  By  value  is  here  meant  the  subjective  importance  of  a 
good.  This  is  measured  in  terms  of  marginal  utility.  By 
price  is  meant  the  quantity  of  money,  or  of  the  objective 
money  commodity  for  which  the  good  in  question  will  ex- 
change. 

Value  as  thus  defined  corresponds  to  the  subjective  use 
value  of  the  Austrian  economists,  and  price  to  their  objective 
exchange  value.  It  is  true  that  we  might  say  that  the  objec- 
tive exchange  value  of  a  cow  is  the  horse  for  which  it  is  ex- 
changed, but  in  any  developed  society  these  direct  exchanges 
are  rare, — almost  all  exchanges  being  made  against  money. 
And  so  we  find  that  as  a  matter  of  fact  the  Austrians  limit 
objective  exchange  value  to  the  phenomenon  of  price. 
54 


THE  MONOPOLY  THEORY  OF  PRICE. 


55 


Fm-  4' 


I.    THE  PRICE  OF  A  SINGLE  GOOD. 

21.  Normal  Value  and  Price.  —  If  with  the  older 
economists  we  hold  that  free  competition  is  the  rule 
and  scarcity  goods  the  exception,  then  our  investiga- 
tion must  be  confined  to  the  phenomena  of  normal 
value  and  price.  In  this  case  marginal  utility,  mar- 
ginal disutility,  value,  and  price  all  coincide.  This 
is  brought  out  quite 
clearly  in  Fig.  4.  In 
Fig.  1  we  had  the  dia- 
gram of  the  line  of  cost 
or  disutility.  In  Fig.  2 
we  had  the  diagram  of 
the  line  of  utility.  In 
Fig.  4  these  two  dia- 

grams are  combined.  Here  the  line  of  utility,  UiU2, 
and  the  line  of  disutility,  DjDa,  intersect  at  the  point 
N.  If  the  supply  of  the  commodity  is  OA1?  the  utility 
AiUi  exceeds  the  disutility  AjDi.  This  indicates 
that  the  production  of  the  commodity  is  profitable, 
and  therefore  that  others  will  be  induced  to  enter 
this  branch  of  industry.  If  this  results  in  an  in- 
crease of  the  amount  of  commodity  to  OA2,  the  dis- 
utility A2D2  exceeds  the  utility  A2U2.  This  indi- 
cates that  the  production  of  the  commodity  is  no 
longer  profitable;  a  restriction  in  the  amount  of 
commodity  produced  will  therefore  result.  The 
tendency,  of  course,  will  be  for  the  production  of 
the  amount  of  commodity  to  settle  at  OM,  where  the 


56  VALUE  AND  DISTRIBUTION. 

utility  and  disutility  are  equal.  This  is  the  case  of 
normal  value  and  price,  both  of  which  are  here 
represented  by  MN.* 

22.  Other  Conditions  under  which  Marginal  Util- 
ity determines  Price. — It  is  true  that  if  competi- 
tion is  assumed  to  be  absolutely  free  on  the  side  of 
the  consumers  (that  is,  the  producers  have  the  entire 
monopoly  advantage),  the  price  of  the  good  may  be 
forced  up  to  the  limit  of  its  marginal  utility  to  the 
consumer.  But,  on  the  other  hand,  it  is  equally  true 
that  if  competition  is  absolutely  free  on  the  side  of 
the  producers  (the  consumers  having  the  entire 
monopoly  advantage)  the  price  may  be  forced  down 
to  the  extreme  limit  of  the  marginal  utility  of  the 
good  to  the  producer.  This  finds  graphic  illustra- 
tion in  Fig.  4.  The  case  where  the  producer  has 
the  monopoly  advantage  is  indicated  by  A^U,,  while 
the  consumer  has  the  monopoly  advantage  in  the 
case  indicated  by  AaUaDa. 

It  may  at  first  be  somewhat  confusing  to  speak 
of  this  last  case  as  a  case  of  monopoly  or  scarcity 
price,  since  the  supply  of  the  good  offered  by  the 
producer  is  in  excess  of  the  normal  supply.  The 
confusion,  however,  is  largely  due  to  our  tendency  to 
regard  one-half  of  the  transaction  as  the  whole  phe- 
nomenon, just  as  in  physics  there  is  a  tendency  to 
think  of  force  and  resistance  as  separate  phenomena. 

*  This  diagram  was,  I  believe,  first  employed  by  Marshall 
in  a  paper  that  only  had  a  private  circulation. 


THE     MONOPOLY  THEORY  OF  PRICE.  57 

The  physicist,  however,  sees  very  clearly  that  action 
and  reaction  are  necessary  complements  of  each 
other,  and  in  the  same  way  the  commodities  offered 
in  exchange  by  the  producer  and  the  consumer  are 
necessary  complements  of  each  other.  While  it  may 
not  be  strictly  correct  to  speak  of  the  commodity 
offered  by  the  producer  as  a  scarcity  good  when  its 
price  is  below  its  cost,  yet  it  is  true  that  its  price  is 
determined  under  monopoly  conditions,  only  the 
monopoly  is  due  to  the  relative  scarcity  of  the  com- 
modity offered  in  exchange  by  the  consumer;  the 
monopoly,  therefore,  inures  to  the  benefit  of  the  con- 
sumer by  enhancing  the  purchasing  power  of  his  com- 
modity. In  other  words,  we  here  have  one  of  those 
unfortunate  abstractions  of  the  understanding,  as 
Hegel  styles  them,  in  which  half  the  phenomena  is 
taken  for  the  whole. 

In  general,  however,  neither  competition  nor  mo- 
nopoly is  absolute  on  either  side  of  the  transaction. 
As  a  rule,  the  weaker  party  still  retains  some  mo- 
nopoly strength,  and  the  price  is  determined  at  some 
intermediate  point  by  the  relative  monopoly  strength 
of  buyer  and  seller.  In  other  words,  the  upper  and 
lower  limits  of  prices  being  determined  by  marginal 
utility  and  marginal  disutility,  the  price  approaches 
the  former  if,  with  the  Austrian  school,  we  assume 
that  the  producers  have  the  monopoly  advantage,  and 
approaches  the  latter  if,  with  the  orthodox  school,  we 
assume  that  the  consumers  have  the  monopoly  advan- 
tage. It  would,  of  course,  greatly  simplify  the  mat- 


58 


VALUE  AND  DISTRIBUTION. 


FIG.  6. 


ter  if  we  could  solve  all  our  problems  in  terms  of  one 
or  the  other  of  these  variables,  but,  unfortunately,  the 
phenomena  are  too  complex  for  any  such  solution. 
The  best  that  can  be  hoped  for  is  a  determination  be- 
tween the  limits  of  marginal  utility  and  marginal 
disutility.  At  what  intermediate  point  the  price  will 
actually  be  fixed  is  not  given  to  us  to  say,  for  this  de- 
pends upon  the  relative  monopoly  strength  of  the  con- 
testants, and  so  upon  an  indeterminate  element. 

23.  The  Diagram  of  the  Austrian  Economists. — In 
conclusion,  it  may  be  said  that  the  entire  discussion 
resolves  itself  into  the  question,  May  or  do  marginal 

consumers'  surpluses  arise? 
The  advocates  of  marginal 
utility  assume,  for  the  most 
part  unconsciously,  that 
they  do  not  arise  in  the 
bulk  of  the  world's  ex- 
change. This  is  brought 
out  very  clearly  in  Fig.  5, 
a  diagram  which  S.  N. 
Patten  employs  to  such 
good  purpose.  In  this  the 
consumer's  surplus  is  always  represented  as  a  tri- 
angle or  as  a  differential  surplus,  the  total  rectangle 
or  marginal  surplus  being  given  to  the  producers. 
(See  "  The  Theory  of  Dynamic  Economics,"  p.  91.) 

24.  Diagram  of  the  Monopoly  Theory  of  Price. — 
My  own  contention  is  that  this  scheme  of  distribu- 
tion involves  the  assumption  that  there  are  no  non- 


Coasumers 

Surplus 


Producers  Marginal 
Surplus 


Producers  Differential 
Surplus 


Differential  Cost 


JLowest  Cost 


THE  MONOPOLY  THEORY  OF  PRICE. 


59 


FIG.  6. 


Consumers 
Differential  Surplus , 


competing  groups  among  consumers,  or  that  among 
them  we  have  an  ideal  condition  of  free  competition. 
The  obligation  cer- 
tainly rests  upon 
the  Austrian  school 
to  show  that  this 
is  true.  If  it  is 
not  true,  then  the 
marginal  surplus 
will  be  divided,  as 
is  shown  in  Fig.  6, 
between  consumers 
and  producers  in 
accordance  with  their  relative  monopoly  strength.* 


Consumers 
Marginal  Surplus 


Producers 
Marginal  Surplus 

Producers  Differential 
Surplus^ 

Lowest  Cost 


II,    THE  PRICE  OF  COMPLEMENTARY  GOODS. 

Thus  far  in  examining  the  various  phenomena  of 
value  the  discussion  has  been  confined  to  the  deter- 


*  It  is  well  known  that  the  promulgation  of  the  marginal 
utility  theory  of  value  gave  a  strong  impulse  to  the  mathe- 
matical treatment  of  problems  in  economic  theory.  Of  course, 
protests  against  this  have  been  made  on  the  ground  that  the 
subjective  utilities  are  not  capable  of  exact  measurement. 
What  is  really  meant  by  this  is,  that  the  subjective  phenomena 
of  value  are  not  capable  of  exact  measurement  in  the  terms 
of  the  objective  phenomena  of  price.  For,  as  has  been  shown, 
the  subjective  and  objective  phenomena  are  never  in  exact 
correspondence  except  in  the  case  of  normal  value.  From 
this  it  follows  that  economics  cannot  be  treated  as  an  exact 
science,  though  certain  laws  or  tendencies  may  be  more  or 
less  clearly  determined. 


60  VALUE  AND  DISTRIBUTION. 

mination  of  the  price  of  a  single  good.  It  will  now 
be  necessary  to  consider  the  phenomena  in  which 
several  productive  goods  enter  into  the  creation  of  a 
resulting  consumption  good. 

We  have  here  a  case  of  the  phenomenon  that 
Menger  has  so  happily  characterized  as  "  Comple- 
mentary Goods. "  The  pleasure  that  may  be  realized 
from  the  resulting  consumption  good  is  dependent 
upon  our  possession  of  each  and  all  of  the  comple- 
mentary productive  goods.  Hence  in  parting  with 
one  of  the  latter  we  lose  not  only  the  pleasure  that 
would  result  from  the  direct  consumption  of  that 
single  commodity,  but  also  an  additional  pleasure 
due  to  the  importance  of  this  single  good  to  the  com- 
plementary group  of  which  it  forms  an  essential  part. 
In  other  words,  a  single  commodity  when  it  becomes 
a  part  of  such  a  group  has,  as  it  were,  two  marginal 
utilities  or  values.  This  raises  the  question,  Which 
of  these,  or  what  combination  of  these,  determines 
the  price  of  this  productive  good  ? 

25.  The  Confusion  in  the  Austrian  Treatment  of 
Complementary  Goods. — Bohm-Bawerk  insists  most 
strenuously  that  even  in  this  connection  marginal 
utility  is  the  all-sufficient  determinant  of  value  and 
price.  He  writes,  "  It  is  easy  to  see  that  the  intimate 
corelation  of  complementary  goods — the  corelation  in 
which  they  afford  this  utility — will  be  reflected  in  the 
formation  of  their  value.  This  leads  to  a  number  of 
peculiarities,  all,  however,  occurring  within  the  limits 
of  the  universal  law  of  marginal  utility."  ("  Positive 


THE  MONOPOLY  THEORY  OF  PRICE.  61 

Theory  of  Capital,"  p.  170.)  But,  since  such  goods 
have  two  marginal  utilities,  the  question  naturally 
arises,  Which  of  these  determines  their  price  ? 

Menger  holds  that  the  price  of  such  good  is  deter- 
mined by  the  sum  of  the  two  utilities.  Menger's  de- 
fence of  this  contention  might  prove  very  interesting. 

Wieser  tells  us  that  "  The  imputation  of  the  pro- 
ductive contribution  assigns  in  this  way  to  every 
productive  good  a  medium  share.  To  calculate  the 
productive  contribution,  and  therefore  also  the  value 
at  this  medium  amount,  is  sound  common  sense." 
("  Natural  Value,"  p.  93.) 

26.  Complementary  Goods  an  Ordinary  Case  of 
Scarcity  Price. — Here,  as  elsewhere,  appeals  to 
"  common  sense"  are  to  be  viewed  with  suspicion. 
The  difficulty  which  the  Austrian  economists  find 
in  the  case  of  complementary  goods  is  due  to  the 
fact  that  in  their  general  discussion  of  value  and 
price  they  have  labored  to  eliminate  the  determina- 
tion between  limits,  and  to  show  that  both  value  and 
price  depend  in  last  resort  upon  the  marginal  utility 
of  the  good  to  the  consumer  or  buyer.  Hence,  when 
they  came  to  the  question  of  complementary  goods, 
they  thought  they  had  found  an  exceptional  compli- 
cation, for  it  was  clear  that  in  this  case  the  marginal 
utility  to  buyer  and  seller  only  set  limits  within 
which  the  price  may  vary.  And  so,  without  further 
analysis,  we  are  told  that  the  price  is  fixed  at  the 
middle  point  between  these  limits,  or  that  it  is  "a 
medium  amount." 


62  VALUE   AND  DISTRIBUTION. 

As  a  matter  of  fact  we  here  have  a  case  of  every 
day  scarcity  price.  The  owner  of  the  other  pro- 
duction goods  necessary  to  the  complementary  group 
and  the  owner  of  the  single  good  that  is  likewise 
necessary  to  the  completion  of  this  group  stand  over 
against  each  other  as  the  prospective  buyer  and  seller 
of  the  single  good.  Here,  as  in  every  instance  of 
scarcity  price,  the  marginal  utility  of  the  good  to  the 
buyer  and  its  marginal  utility  to  the  seller  fix  the 
upper  and  lower  limits  of  the  price.  At  what  point 
the  price  will  actually  be  fixed  depends  upon  the 
relative  monopoly  strength  of  the  parties  to  the 
transaction.  The  price,  therefore,  is  incapable  of  re- 
duction under  any  definite  law  save  when  the  single 
good  is  freely  reproducible.  In  every  other  instance 
the  price  depends  on  the  relative  monopoly  strength 
of  buyer  and  seller.  It  is  in  this  way,  and  in  this 
way  alone,  that  every  good  that  enters  into  a  com- 
plementary group  has  its  share  in  the  joint  product 
determined.  From  this  it  is  manifest  that  comple- 
mentary goods  are  not  a  complication  that  demands 
a  special  analysis.  Instead  they  are  included  under 
the  ordinary  and  prevailing  case  of  scarcity  price. 


CHAPTER    VI. 

VALUE  AND  PRICE. 

NOTHING  has  interfered  more  seriously  with  the 
popular  acceptance  of  the  Marginal  Utility  Theory 
than  the  formidable  appearance  of  the  terms  employed 
by  its  advocates, — to  wit,  subjective  use  value,  subjec- 
tive exchange  value,  and  objective  exchange  value. 
Indeed,  no  one  can  deplore  more  earnestly  than  the 
Austrians  themselves  the  cumbersome  terminology 
which  seems  to  be  necessitated  by  their  analysis  of 
value  and  price.  Bohm-Bawerk  writes :  "  I  frankly 
confess  that  I  would  gladly  exchange  these  pedantic 
and  clumsy  expressions  for  terms  more  euphonious 
and  popular,  if  they  could  be  got  to  indicate  the 
opposition  referred  to  with  even  approximate  cor- 
rectness. But  I  have  not  been  able  to  find  such 
expressions.  The  words  Use  Value  and  Exchange 
Value  are  not  suitable  at  all,  because,  as  we  shall 
see,  there  is  a  Subjective  Exchange  Value.* 

The  source  of  the  difficulty  is  here  clearly  indi- 
cated. It  is  the  existence  of  certain  phenomena  to 
which  Bohm-Bawerk  has  given  the  name  "  Subjec- 
tive Exchange  Value."  I  would,  however,  urge  that 
the  elevation  of  this  phenomenon  into  the  same  rank 


*  Positive  Theory  of  Capital,  p.  130. 

63 


64  VALUE  AND  DISTRIBUTION. 

with  Subjective  Use  and  Objective  Exchange  Value 
is  unnecessary,  and  tends  to  obscure  the  important 
distinction  between  the  subjective  and  objective  phe- 
nomena which  the  Austrians  have  labored  so  zealously 
to  establish. 

27.  Subjective  Exchange  Value  is  not  a  Primary 
Phenomenon  of  Value. — First  let  us  be  entirely  clear 
as  to  what  is  here  meant  by  Subjective  Exchange 
Value.  Let  us  assume  that  tobacco,  when  I  smoke 
it  myself,  has  a  marginal  utility  of  4.  It  may,  how- 
ever, happen  that  I  can  exchange  the  tobacco  for 
wheat  with  a  marginal  utility  of  8.  Under  such  cir- 
cumstances the  actual  value  of  the  tobacco  will  be  8. 
Here  4,  or  the  marginal  utility  of  the  tobacco  when 
directly  consumed  by  myself,  is  its  subjective  use 
value;  while  the  marginal  utility  which  I  secure 
by  exchanging  the  tobacco  for  wheat  is  the  subjective 
exchange  value  of  the  tobacco,  which  in  this  instance 
is  8.  Or  as  Bohm-Bawerk  puts  it,  the  value  of  the 
tobacco  is  here  determined  by  the  marginal  utility 
of  a  foreign  class  of  goods. 

There  are  several  serious  defects  in  the  reasoning 
employed  in  the  discussion  of  this  part  of  the  sub- 
ject. One  noticed  by  Bohm-Bawerk  himself  is  the 
speaking  of  two  marginal  utilities  for  the  same  com- 
modity. This  at  one  and  the  same  time  and  to 
one  and  the  same  person  is  manifestly  impossible. 
Again,  it  may  well  be  questioned  whether  it  is  true 
that  the  value  of  any  consumption  good  is  in  last 
resort  determined  by  the  marginal  utility  of  a  "  for- 


VALUE  AND  PRICE.  65 

eigii  class  of  goods."  What  we  really  do  is  to  ex- 
change tobacco  at  4  for  wheat  at  8  until  the  supply 
of  tobacco  is  so  reduced  that  its  marginal  utility  has 
been  raised  to  8. 

But  all  this  aside,  we  fail  to  see  that  Bohm-Ba- 
werk  has  anywhere  justified  his  elevation  of  "  Sub- 
jective Exchange  Value"  to  the  rank  of  a  primary 
phenomenon  of  value.  In  the  chapter  in  which  he 
seeks  to  establish  this  rank  for  subjective  exchange 
value  the  burden  of  the  argument  is  devoted  to  an 
effort  to  show  that  this  phenomenon  is  essentially  dif- 
ferent from  that  of  objective  exchange  value.  This 
we  freely  grant,  and  for  the  reason  urged,  that  one  is 
a  subjective  and  the  other  an  objective  phenomenon. 
But  we  fail  to  see  that  he  has  anywhere  shown  that 
any  such  fundamental  difference  exists  between  sub- 
jective use  value  and  this  so-called  subjective  ex- 
change value. 

The  difference  between  the  direct  and  indirect  use 
of  a  commodity  may  or  may  not  be  of  sufficient  im- 
portance to  justify  their  recognition  as  subdivisions 
of  use  value,  just  as  we  recognize  normal  and  mar- 
ket price  as  subdivisions  of  objective  exchange  value. 
But  I  fail  to  find  any  sufficient  reason  for  elevating 
the  indirect  use  or  subjective  exchange  value  to  the 
rank  of  a  primary  phenomenon  of  value. 

28.  Use  and  Exchange  Value  versus  Value  and 
Price. — Subjective  exchange  value  being  thus  elimi- 
nated as  a  primary  phenomenon,  we  are,  by  Bohm- 
Bawerk's  own  statement,  brought  back  to  the  older 


66  VALUE  AND  DISTRIBUTION. 

and  less  cumbersome  terms,  use  value  and  exchange 
value.  We  have  now  to  inquire  as  to  the  expediency 
of  including  such  essentially  different  phenomena 
under  the  common  term  value.  Wieser  writes  :  "  It 
must  be  emphasized  that  the  word  value  alters  its 
original  meaning  somewhat  when  transferred  from 
the  subjective  relations  to  wants  to  the  objec- 
tive relations  to  price."  ("  Natural  Value,"  p.  51.) 
Why,  then,  I  would  ask,  must  we  continue  to  in- 
clude both  phenomena  under  the  common  term 
value  ?  Would  not  the  antithesis  between  these  two 
concepts  be  more  clearly  apprehended  if  they  were 
always  known  by  essentially  different  names,  one  as 
value,  the  other  as  price  ?  Even  though  a  generic 
term  that  would  include  both  phenomena  is  desira- 
ble, yet  why  should  we  confound  the  discussion  by 
compelling  the  term  value  to  perform  this  function  ? 
As  a  matter  of  fact,  it  is  much  to  be  doubted  whether 
anything  is  gained  by  the  introduction  of  such  a 
generic  term. 

The  only  attempt  in  the  writings  of  the  Austrian 
economists  to  justify  the  continuance  of  "  value"  as  a 
generic  term  is  found  in  the  following  passage  from 
Bohm-Bawerk :  "The  two  groups  of  phenomena  to 
both  of  which  popular  usage  has  given  the  ambigu- 
ous name  'Value'  we  shall  distinguish  as  value  in 
the  Subjective  and  value  in  the  Objective  sense." 
("  Positive  Theory  of  Capital,"  p.  130.)  Now,  while 
I  would  be  among  the  last  to  break  unnecessarily 
with  the  traditions  of  the  past,  yet  it  may  fairly  be 


VALUE  AND  PRICE.  67 

asked,   Why   continue  a  "popular  usage"   that  in- 
volves us  in  a  confessed  ambiguity  ? 

This  substitution  of  the  terms  value  and  price  for 
the  more  cumbersome  terms  subjective  use  value  and 
objective  exchange  value  is  open  to  but  one  objection. 
That  is,  the  fear  that  we  may  lose  sight  of  the  distinc- 
tion between  value  as  a  subjective  and  price  as  an 
objective  phenomenon.  The  importance  of  this  dis- 
tinction between  the  subjective  and  objective  phe- 
nomena cannot  be  too  strongly  insisted  upon,  but  it 
may  well  be  questioned  whether  their  inclusion 
under  the  common  term  value  does  not  tend  to  ob- 
scure this  distinction.  I  would  therefore  suggest  that 
the  term  value  be  strictly  confined  to  the  subjective 
phenomena,  and  that  the  term  price  be  similarly 
restricted  to  the  objective  phenomena.  One  is  the  im- 
portance of  the  good  to  the  individual  measured  in 
terms  of  marginal  utility.  The  other  involves  a 
compromise  between  two  such  subjective  estimates, 
and  is  measured  in  the  objective  terms  of  the  quan- 
tity of  money  or  money  commodity  for  which  the 
good  in  question  will  exchange.  The  price,  of  course, 
always  has  some  relation  to  the  marginal  utility  or 
value  of  the  good ;  but  the  correspondence  between 
value  and  price,  as  was  shown  in  the  previous  chapter, 
is  never  exact  save  in  the  case  of  normal  value  and 
price.  In  general  the  marginal  utility  of  the  good  to 
consumer  and  producer  only  establishes  limits  within 
which  the  price  may  vary. 


CHAPTER   VII. 

COST  AND  PRICE. 

THE  Austrian  economists  hold  that  even  in  the 
case  of  freely  reproducible  goods  "  The  law  of  costs 
is  only  an  approximate  law."  And  again,  that  "Costs 
are  not  the  final  but  only  the  intermediate  cause  of 
value.  In  last  resort  they  do  not  give  it  to  their 
products,  but  receive  it  from  them."  ("  Positive 
Theory  of  Capital,"  pp.  188,  189.)  It  will  be  neces- 
sary to  examine  these  contentions  with  some  care. 

I.  THE  LAW  OF  COST  AND  THE  PRICE  OF  FREELY  REPRO- 
DUCIBLE GOODS. 

The  contention  that  even  in  the  case  of  freely  re- 
producible goods  the  law  of  cost  is  only  an  approxi- 
mate law  will  require  some  explanation.  We  have 
seen  that  one  of  the  arguments  urged  against  the  cost 
theory  of  value  was  that  even  so-called  freely  repro- 
ducible goods  are  in  reality  scarcity  goods  during 
all  the  fluctuations  of  their  price  on  either  side  of 
the  normal.  From  this  Bohm-Bawerk  has  elsewhere 
argued  that  freely  reproducible  commodities  are  ex- 
ceedingly rare,  and  hence  the  failure  of  the  cost 
theory  as  a  general  theory  of  price. 

29.  The  Law  of  Cost  is  here  an  Exact  Law. — 
It  may  be  asked,  however,  if  it  is  entirely  fair  to  first 
show  that  these  so-called  freely  reproducible  goods  are 
for  a  large  part  of  the  time  scarcity  goods,  and  then 

68 


COST  AND  PRICE.  (39 

to  employ  the  same  argument  to  show  that  cost  does 
not  exactly  determine  the  price  of  these  so-called 
freely  reproducible  goods  during  the  time  that  they 
are  in  reality  scarcity  goods.  The  goods  are,  at  any 
given  instant,  either  scarcity  goods  or  freely  repro- 
ducible goods.  Under  the  former  assumption  we 
are  constrained  to  admit  that  the  law  of  cost  does  not 
give  an  exact  determination  of  their  price.  It  is, 
however,  just  as  clear  that  during  the  interval  that 
the  price  is  at  the  normal  point,  or  while  these  goods 
are  freely  reproducible,  in  any  strict  sense  of  this 
phrase  the  law  of  cost  is  not  an  "  approximate  law," 
but  determines  the  price  with  absolute  exactness. 

30.  Cost  is  here  a  Direct  Cause  of  Value. — The 
second  of  the  above  contentions,  that  "  Even  where 
the  law  of  cost  holds,  costs  are  not  the  final  but 
only  the  intermediate  cause  of  value,"  is  open  to 
equally  serious  criticism.  The  argument  upon  which 
this  contention  is  based  is  in  brief  as  follows:  Under 
modern  conditions  most  goods  are  produced  in  an- 
ticipation of  the  market,  hence  the  determination  of 
the  utility  of  the  goods  precedes  in  time  the  deter- 
mination of  the  disutility  which  men  will  endure  in 
the  production  of  the  good.  From  this  it  is  inferred 
that  the  causal  relation  is  from  marginal  utility  to 
cost.  Some  special  complications  are  discussed  in 
Bohrn-Bawerk's  chapter  on  "  The  Value  of  Produc- 
tive Goods,"  but  the  whole  argument  may  fairly  be 
resolved  into  an  attempt  to  establish  the  above  causal 
relation. 


70  VALUE  AND  DISTRIBUTION. 

So  far  as  the  present  writer  can  see,  this  entire  dis- 
cussion as  to  the  precedence  of  utility  or  disutility  in 
the  determination  of  price  is  not  only  without  any 
real  profit,  but  is  actually  misleading.  For  no  matter 
what  the  seeming  order  of  precedence  may  be,  the 
fact  remains  that  in  the  case  of  freely  reproducible 
goods  (normal  price) ,  the  determination  is  contingent 
not  upon  one  but  upon  two  factors.  It  is  true  that 
the  price  of  such  good  may  be  measured  either  in 
terms  of  marginal  utility  or  of  marginal  disutility, 
but  its  determination  depends  upon  the  coincidence, 
of  these  two  factors.  (See  Fig.  4,  page  55.) 

When,  therefore,  the  Austrian  economists  tell  us 
that  in  last  resort  the  value  even  of  freely  repro- 
ducible goods  is  determined  by  marginal  utility  and 
not  by  cost,  the  question  certainly  seems  a  pertinent 
one :  What  determines  the  point  at  which  this  mar- 
gin is  fixed?  The  immediate  answer  is,  of  course, 
that  it  is  fixed  by  the  limitation  of  the  supply  of  the 
commodity ;  increase  this  supply,  and,  other  things 
being  equal,  marginal  utility  declines.  This,  how- 
ever, only  raises  the  further  question,  How  or  by 
what  is  the  supply  limited  ?  In  the  case  of  scarcity 
goods  this  limitation  is  clearly  effected  by  indeter- 
minate monopoly  influences ;  but  in  the  case  under 
discussion,  that  of  freely  reproducible  goods,  the  only 
limitation  to  the  supply  is  found  in  the  cost  of  the 
goods,  or  in  the  marginal  disutility  endured  in  their 
production. 

The  error  of  the  Austrian  economists  lies  in  the 


COST  AND  PRICE.  71 

assumption  that  in  marginal  utility  we  have  a  phe- 
nomenon that  is  incapable  of  further  analysis,  an 
assumption  that  is  largely  true  so  long  as  we  confine 
ourselves  to  scarcity  goods.  But  when  we  turn  to 
freely  reproducible  goods  it  is  clearly  in  order  for  us 
to  inquire  what  determines  this  margin.  If,  for  in- 
stance, in  the  equation  v  =  xy  we  assume  x  to  be  fixed, 
then  v  will  vary  with  y.  It  still  remains,  however, 
for  us  to  inquire  what  determines  x.  This  limiting 
element  in  the  case  of  freely  reproducible  goods  is 
clearly  the  marginal  disutility  incident  to  the  pro- 
duction of  the  goods. 

II.    THE  LAW  OF  COST  AND  THE  PRICE  OF  SCARCITY  GOODS. 

Under  this  heading  I  will  endeavor  to  show  that, 
contrary  to  the  teachings  of  the  Austrians,  cost  plays 
an  important  part  even  in  the  determination  of  the 
price  of  scarcity  goods. 

31.  A  Substitute  always  Possible. — I  may  em- 
ploy my  resources  either  in  the  purchase  of  rare 
wine  or  in  the  purchase  of  a  diamond, — which  shall 
it  be  ?  Manifestly  that  which  for  a  given  expendi- 
ture will  yield  the  greatest  utility.  Let  us  assume 
that  it  is  the  rare  wine.  This  raises  the  question, 
How  under  such  circumstances  do  I  determine  the 
maximum  amount  which  I  will  give  for  the  wine? 
Clearly  this  is  very  seriously  affected  by  the  price  at 
which  I  can  secure  the  diamond. 

In  other  words,  there  is  no  good  so  unique  or  rare 
but  that  some  substitute  for  it  can  be  found.  The 


72  VALUE  AND  DISTRIBUTION. 

difference  between  the  freely  reproducible  and  the 
rare  good  is  not  that  a  substitute  can  be  found  for 
one  and  not  for  the  other,  but  that  in  the  case  of  a 
freely  reproducible  good  an  entirely  equivalent  sub- 
stitute can  be  found,  while  in  the  rare  good  the  sub- 
stitute is  not  entirely  equivalent.  It  is  nevertheless 
true  that  in  determining  the  price  of  either  kind  of 
good  we  necessarily  have  in  mind  the  cost  of  the 
next  best  substitute.  In  the  case  of  freely  repro- 
ducible goods,  this  cost  of  the  substitute  fixes  the 
price  of  the  desired  goods  with  absolute  exactness. 
In  the  case  of  scarcity  goods,  no  such  exact  deter- 
mination is  possible,  for  we  are  manifestly  willing 
to  give  for  the  desired  good  not  only  the  cost  of 
the  next  best  substitute,  but,  in  addition  to  this, 
an  allowance  for  the  greater  utility  of  the  desired 
good.* 

That  this  is  the  mental  process  through  or  by 
which  we  determine  what,  if  need  be,  we  are  willing 
to  give  for  any  rare  good  the  most  cursory  intro- 
spection will  reveal.  The  reason  for  adopting  this 
method  is  likewise  manifest.  It  lies  in  the  indefinite 
and  unsatisfactory  character  of  all  subjective  esti- 
mates. This  compels  us  to  adopt  some  more  tangible 
and  objective  method,  even  though,  as  in  the  case  in 
hand,  we  seem  to  further  complicate  the  problem  by 
introducing  a  second  subjective  estimate, — the  mar- 
ginal utility  of  the  proposed  substitute. 

*  See  Clark's  Philosophy  of  Wealth,  p.  104. 


COST  AND  PRICE.  73 

32.  The  Substitute  is  in  Last  Resort  a  Freely  Re- 
producible Good. — As  this  substitute  is  in  last  resort 
a  freely  reproducible  commodity,  its  marginal  utility 
may  be  measured  in  the  terms  of  price.  Hence  to 
this  extent  the  value  or  subjective  estimate  of  a 
scarcity  good  finds  exact  objective  expression.  This, 
however,  does  not  represent  the  total  price  of  such 
scarcity  goods,  for  as  was  seen,  we  are  willing  to  pay 
something  in  addition  for  its  superior  advantages. 
In  our  endeavor  to  measure  the  difference  between 
the  marginal  utility  of  the  scarcity  good  and  the 
marginal  utility  of  its  substitute,  we  are  limited  to 
the  methods  that  are  applicable  to  subjective  phe- 
nomena. Hence  inexact  and  tentative  results  alone 
are  possible.  The  point  at  which  the  price  is  ac- 
tually fixed  depending  in  this  case  upon  the  relative 
monopoly  strength  of  buyer  and  seller. 


CHAPTER   VIII. 

DISTRIBUTION  AND  THE  THEORIES  OP  UTILITY, 
VALUE,  AND  PRICE. 

NOT  the  least  of  the  many  valuable  contributions 
of  the  Austrian  economists  is  their  clear  exposition 
of  the  intimate  relation  that  exists  between  the  phe- 
nomena of  value  and  price  on  the  one  hand  and  the 
phenomena  of  distribution  on  the  other.  All  know 
that  primarily  the  problem  of  distribution  is  to  de- 
termine how  the  price  of  commodities  is  divided 
among  the  several  parties  to  the  transaction.  Yet, 
despite  this,  we  are  prone  to  lose  sight  of  the  very 
intimate  relation  that  exists  between  the  phenomena 
of  distribution,  value,  and  price. 

33.  Society  is  interested  in  the  Increase  of  Total 
Utility. — One  of  the  first  points  that  must  be  clearly 
recognized  in  this  connection  is  the  fact  that  society 
as  a  whole  is  not  primarily  interested  either  in  the 
increase  of  total  value,  value  per  unit,  or  price,  but 
is  interested  in  the  increase  of  total  utility.  (See 
page  38.)  For  if  this  is  not  true,  then  all  that  is 
necessary  to  increase  the  happiness  of  mankind  is  to 
decrease  the  supply  of  pleasurable  commodities  and 
so  raise  their  marginal  utility.  (See  Fig.  2,  page 
37.) 

As  a  matter  of  fact,  however,  total  value  and  total 
utility  frequently  increase  together,  and  in  such  in- 

74 


DISTRIBUTION  AND  UTILITY,  VALUE,  AND  PRICE.       75 


stances  society  can  find  guidance  in  its  economic 
conduct  in  the  terms  of  total  value.  This,  of  course, 
has  the  great  practical  advantage  that  total  value  is 
more  readily  computed  than  total  utility.  For  while 
total  utility  can  only  be  determined  by  the  summa- 
tion of  a  long  series  of  marginal  utilities,  total  value 
is  simply  the  product  of  the  quantity  of  commodity 
by  its  final  marginal  utility. 

34.  The  Individual  is  interested  in  the  Increase 
of  Total  Value. — As  a  matter  of  fact,  however,  this 
increase  of  total  value  parri  passu  with  the  increase 
of  total  utility  is  not  realized  except  under  the  as- 
sumption of  free  competition  :  hence  it  is  not  a  uni- 
versal or  even  a  general  experience.  It  might,  for 
instance,  very  readily  happen  that  an  increase  in  the 
supply  of  a  commodity  beyond  a  certain  point  would 
cause  a  very  rapid  decline  not  only  in  the  marginal 
utility  or  value  per 
unit  but  also  in  the 
total  value.  This  is 
shown  graphically  in 
Fig.  7,  where  with  a 
supply  represented  by 
OA  the  total  value  is 
the  area  OAUF,  while 
increase,  AM,  to 


Pio.  7. 


an 


the   supply  results  in  - 
the  total  value  repre- 
sented by  the  much  smaller  rectangle,  OMNE;  on 
the  other  hand,  the  total  utility  increases  from  the 


76  VALUE  AND  DISTRIBUTION. 

area  OAUY  to  OMNUY,  or  increases  by  the  area 
AMNU.  If,  therefore,  the  primary  interest  of  so- 
ciety is  in  the  increase  of  total  utility,  it  becomes 
manifest  that  total  value  is  not  a  safe  guide. 

By  reference  to  page  41  it  will  be  seen  that  the 
above  graphic  illustration  is  the  same  figure  that 
was  employed  in  the  discussion  of  the  practice  of  the 
Dutch  East  India  Company  in  destroying  a  portion 
of  their  crops  in  order  to  enhance  the  marginal 
utility  and  so  the  price  of  the  balance.  In  other 
words,  the  interests  of  society  and  the  interest  of  the 
individual  may  be  at  serious  variance.  The  interests 
of  society  are  best  subserved  by  increasing  the  total 
utility  or  the  supply  of  all  useful  commodities ;  or, 
rather,  in  approximating  the  condition  of  free  com- 
petition. The  interest  of  the  individual  controlling 
the  supply  of  any  one  commodity  is  in  the  direction 
of  increasing  its  value  and  price,  and  so  diverting  a 
larger  share  of  the  general  social  product  to  his  own 
peculiar  advantage.  Or,  stated  in  a  more  familiar 
way,  society  desires  free  competition  in  all  commodi- 
ties, the  individual  desires  free  competition  in  all 
commodities  save  the  one  that  he  supplies. 

This,  indeed,  is  the  scientific  basis  of  Proudhon's 
attack  upon  existing  conditions  and  of  his  claim  that 
only  by  a  socialization  of  all  industrial  operations 
could  this  source  of  evil  be  eliminated.  Our  present 
interest,  however,  is  not  in  the  equity  of  the  case,  but 
to  show  the  very  intimate  relation  that  exists  between 
the  phenomena  of  utility,  value,  and  price  on  the 


DISTRIBUTION  AND  UTILITY,  VALUE,  AND  PBICE.       77 

one  hand  and  the  phenomena  of  distribution  on  the 
other. 

35.  Disadvantages  of  the  Orthodox  Attitude. — 
The  Austrians  were  singularly  happy  in  their  ex- 
position of  this  part  of  the  subject,  and  rightly  in- 
sisted that  the  orthodox  economists  were  at  serious 
fault.  Wieser  writes  :  "  The  classical  political  econ- 
omy really  examines  only  the  value  of  products,  or, 
more  exactly,  of  produced  consumption  goods.  So 
far  as  factors  of  production  are  concerned,  it  looks 
upon  them,  on  the  one  side,  as  sources  of  income 
(rent,  interest,  wages,  and  perhaps  also  under- 
taker's income) ;  on  the  other  side,  as  the  elements 
which  go  to  form  the  cost  of  production,  and  are 
considered  to  decide  principally  the  value  of  the 
products."  * 

The  objection  here  implied  to  the  older  treatment 
of  distribution  is  largely  based  upon  the  antagonism 
of  the  Austrian  economists  to  the  classical  theory  of 
value.  This  is  shown  in  the  concluding  lines  of  the 
paragraph  just  quoted.  The  Austrian  economists 
have,  therefore,  endeavored  to  treat  the  problem  of 
distribution  in  a  way  that  is  more  in  touch  with 
their  own  theory  of  value.  The  fundamental  ques- 
tion with  them  is  not  to  determine  the  share  of  the 
social  product  that  accrues  to  the  'several  factors  of 
production,  but  instead  to  determine  the  share  that 
accrues  to  the  several  productive  goods  which  enter 

*  Natural  Yalue,  p.  71. 


78  VALUE  AND  DISTRIBUTION1. 

into  the  complementary  group  that  is  necessary  to 
the  creation  of  the  consumption  good. 

36.  Advantages  and  Disadvantages  of  the  Aus- 
trian Attitude. — The  difference  in  method  may  not 
at  first  sight  seem  important,  and  it  may  well  be 
that  in  last  resort  they  might  be  made  to  yield  the 
same  result.  It  is  nevertheless  true  that  the  latter 
method  establishes  a  much  more  intimate  connec- 
tion between  the  theory  of  value  and  the  theory  of 
distribution.  This  has  the  great  advantage  that  it 
gives  a  unity  or  coherence  to  economic  theory  as  a 
whole,  which  seemed  sadly  lacking  under  the  older 
method  of  treating  the  problem  of  distribution.  But 
while  the  newer  method  undoubtedly  enjoys  this 
great  advantage,  yet  its  employment  is  attended  with 
a  corresponding  disadvantage.  The  Austrians  have 
labored  to  show  that  freely  reproducible  goods  are 
rather  the  exception  than  the  rule ;  and  so  long  as 
we  confine  ourselves  to  the  consideration  of  concrete 
commodities  much  may  be  said  in  favor  of  this  con- 
tention. Once  persuaded  of  this,  we  are  apt  to  dis- 
miss the  phenomena  of  normal  value  as  of  little 
moment  in  any  discussion  of  distribution,  when  as 
a  matter  of  fact  normal  surpluses  are  of  primary 
importance  in  that  discussion.  We  have  already 
referred  to  this  in  the  Introduction,  but  must  defer 
its  full  explication  to  a  much  later  chapter.  (See 
Sections  113  to  115.) 

In  the  present  volume  we  will  endeavor  not  to  lose 
sight  either  of  the  intimate  relation  that  subsists  be- 


DISTRIBUTION  AND  UTILITY,  VALUE,  AND  PRICE.       79 

tween  the  phenomena  of  value  and  distribution  or  of 
the  important  part  played  by  the  several  factors  of 
production, — land,  entrepreneur,  capital,  and  labor. 
In  other  words,  starting  from  the  phenomenon  of 
price  as  the  concrete  fact  presented  for  analysis,  we 
shall  endeavor  to  formulate  the  laws  by  which  the 
several  forms  of  surplus,  rent,  profit,  interest  on  capi- 
tal, and  gain  of  labor  are  determined. 


PART  II. 


DISTRIBUTION. 


BOOK  I.-RENT. 


CHAPTER  I. 

THE  RENT  OP  LAND. 

THE  earliest  writers  upon  economic  questions  in- 
cluded all  payments  to  a  landlord  under  the  term 
rent.  In  this,  of  course,  they  simply  followed  the 
practice  of  every-day  life.  That  rent  so  defined  is  a 
complex  return  they  probably  realized,  for  the  most 
cursory  examination  of  this  return  reveals  not  only 
a  payment  for  the  use  of  the  land  itself  but  also  an 
amount  that  is  in  reality  interest  on  the  money  in- 
vested in  permanent  improvements.  Despite  this, 
however,  the  pre-Smithian  economists  continued  to 
employ  the  term  rent  in  the  above  described  way  to 
the  confusion  of  their  own  minds  as  well  as  to  the 
confusion  of  their  readers. 

I.  FUNDAMENTAL  PROPOSITIONS, 

37.  An  Agrarian  Doctrine. — With  the  rapid  de- 
velopment of  England's  manufacturing  interests  in 
the  last  half  of  the  eighteenth  century  conditions 
were  developed  that  compelled  an  analysis  of  the 
complex  return  to  which  laymen  had  given  the  name 


84  YALTJE  AND  DISTRIBUTION. 

rent.  Those  who  held  that  the  future  greatness  of 
England  depended  upon  the  development  of  her 
manufacturing  interests  saw  that  these  interests  were 
very  seriously  affected  by  the  rate  of  wages,  and  that 
this  again,  under  the  prevailing  standard  of  life,  de- 
pended very  largely  upon  the  price  of  food.  From 
this  it  was  an  easy  step  to  the  conclusion  that  the 
high  rents  secured  by  the  landlords  were  a  serious 
impediment  to  the  growth  of  the  manufacturing  in- 
terests, and  so  to  the  future  greatness  of  England. 
This,  of  course,  put  the  agrarians  upon  the  defensive, 
and  the  defence  which  they  set  up  was  that  high 
rents  do  not  in  any  way  affect  the  price  of  corn,  and 
so  do  not  affect  the  rate  of  wages. 

38.  Rent  does  not  enter  into  the  Determination 
of  Price. — In  support  of  this  contention  it  was  urged 
that  the  price  of  wheat  must  always  be  high  enough 
to  pay  the  cost  of  production  on  the  poorest  farm 
that  is  maintained  in  cultivation.  Bent,  it  was  said, 
is  the  surplus  secured  by  those  who  have  more 
efficient  farms  (farms  that  are  more  fertile  or  that 
are  nearer  the  market)  :  hence  rent  does  not  de- 
termine price,  but  is  determined  by  price.  Rent  so 
defined  is,  of  course,  an  entirely  different  concept 
from  the  rent  of  every-day  language.  It  clearly  ex- 
cluded all  interests  on  the  cost  of  improvements,  and 
was  supposed  to  include  only  payments  for  "the 
original  and  indestructible  powers  of  the  land." 
The  following  graphic  illustration  may  serve  to  make 
the  thought  a  little  clearer. 


THE   RENT  OF  LAND.  85 

39.  Diagram  of  Rent. — As  the  number  of  farms 
growing  wheat  is  very  large,  and  as  it  is  possible 
that  no  two  are  of 

J  IG.    o. 

exactly    equal    effi-     E 
ciency  in   the  pro- 
duction   of    wheat, 

n,  H 

we  can  conceive  01 
them    as    arranged 

in  a  series  of  increasing  difficulty  or  non-efficiency 
in  production.  In  Fig.  8  OH  represents  the  cost  or 
disutility  of  production  on  the  most  efficient  farm, 
while  MN  represents  the  cost  or  disutility  on  the 
least  efficient  farm,  that  must  be  maintained  in  cul- 
tivation in  order  to  insure  a  given  supply  of  corn. 
Now,  it  was  the  contention  of  those  who  sought  to 
defend  the  agrarian  interests  that  the  price  of  wheat 
must  equal  the  cost,  MN,  or  the  supply  of  corn 
would  decrease ;  for  the  marginal  producer,  or  he 
who  produces  at  the  greatest  cost,  will  not  continue 
to  produce  if  he  does  not  at  least  secure  an  amount 
that  will  cover  his  cost.  In  other  words,  the  price 
of  wheat  is  determined  quite  independently  of  the 
rent  of  the  more  efficient  farms  here  represented  by 
HE  and  DG.  Not  only  so,  but  the  price  must  first 
be  fixed  by  the  cost  on  the  poorest  farm  before  we 
can  determine  the  rent  of  the  better  farms.  Hence, 
rent  is  determined  by  price  and  not  price  by  rent. 
At  MN  cost  and  price  are  equal.  This  is  the  case 
of  a  no-rent  farni. 

The  diagram  usually  employed  to  illustrate  the 


86  VALUE  AND  DISTRIBUTION. 

doctrine  of  rent  is  given  in  Fig.  9.  It  brings  out 
with  great  clearness  the  fact  that  the  rent  of  a  given 
piece  of  land  is  the  difference  in  its  productivity 
and  the  productivity  of  the  poorest  land  in  the  cul- 
tivation for  the  production  of  the  same  commodity. 
If  the  productivity  of  the  various  farms  are  repre- 
sented by  ordinates,  a  line  drawn  through  their  upper 
extremities  would  descend  from  the  productivity  of 
the  best  land,  represented  by  OF,  to  the  productivity 
of  the  poorest  land,  represented  by  MN.  The  total 
rent  arising  from  the  production  of  this  commodity 
is  the  area  FNE,  which  corresponds  with  the  area 
HNE  in  Fig.  8.  In  the  case  of  intensive  culti- 
vation the  area  FNE  or 

FIG.  9.  TT._,._r_  , 

HNE  represents  the  rent 

of  a  particular  farm.    Fig. 

8   has   the   advantage   of 
, bringing   out   in    a    clear 

and  distinct  way  the  fun- 
damental concept  that  underlies  the  doctrine  of  rent, 
— to  wit,  Price  is  determined  by  the  greatest  or  mar- 
ginal cost. 

From  this  it  is  clear  that  the  advocates  of  this  doc- 
trine of  .rent  were  right  when  they  claimed  that  the 
causal  relation  was  not  from  rent  to  price  but  from 
price  to  rent.  In  other  words  as  here  defined,  rent 
does  not  enter  into  the  determination  of  the  price  of 
wheat,  and  so  does  not  interfere  with  the  manufactur- 
ing interests  by  raising  the  cost  of  living  and  so  the 
rate  of  wages.  In  conclusion,  I  would  say  that  there 


THE  RENT  OF   LAND.  87 

is  absolutely  no  hope  for  any  firm  grasp  of  the  most 
elementary  problems  of  economic  theory  until  this 
fundamental  concept,  that  rent  is  a  surplus  which 
does  not  enter  into  the  determination  of  price,  has  been 
made  part  of  our  intellectual  furnishing.  Again,  it 
must  ever  be  borne  in  mind  that  this  proposition 
rests  upon  the  further  contention  that  in  the  case  of 
freely  reproducible  goods  price  is  determined  by  the 
greatest  or  marginal  cost  of  production.  It  may  be 
well  to  preface  our  review  of  the  writers  who  have 
contributed  to  this  part  of  economic  literature  by  a 
brief  enumeration  of  the  several  propositions  that 
are  usually  regarded  as  essential  parts  of  the  doc- 
trine of  rent. 

40.  Rent  due  to  Difference  in  Fertility  and  Dis- 
tance from  Market. — Rent  is  due  to  differences  in 
the  efficiency  of  the  various  farms,  or,  as  it  is  usually 
stated,  to  differences  in  fertility  and  distance  from 
market.  Lying  back  of  this  proposition  we  find  the 
assumption  that  with  the  increase  in  population  men 
are  forced  to  employ  less  and  less  fertile  land.  It  has 
been  objected  to  this  that  it  does  not  correspond  to 
the  actual  order  in  which  land  is  brought  into  culti- 
vation. In  new  countries  the  best  land  frequently 
remains  uncultivated  for  lack  of  sufficient  capital  to 
drain  it,  etc.  A  slight  change  in  the  ordinary  state- 
ment of  the  doctrine  of  rent  will  meet  this  difficulty. 
For,  capital  and  technical  skill  remaining  the  same, 
men  will  always  cultivate  the  more  efficient  land 
first. 


88  VALUE  AND  DISTRIBUTION. 

41.  Law   of  Diminishing   Returns. — It  was   not 
long  before  it  was  seen  that  in  the  extension  of  culti- 
vation men  might  either  have  recourse  to  new  and 
less  efficient  land  or  they  might  expend  more  capital 
and  labor  upon  the  land  already  in  cultivation.     At 
bottom   these   amount  to  one  and  the  same  thing. 
This  method  of  intensive  cultivation,  however,  sug- 
gests the  possibility  of  an  increase  in  cultivation  by 
differential  increments,  a  concept  that  has  some  im- 
portant  theoretical  advantages,  and  is  regarded  by 
some  modern  economists  as  the  typical  case  of  rent. 
In  either  case  an  addition  of  capital  and  labor  may, 
up  to  a  certain  point,  yield  an  increasing  return,  but 
after  reaching  that  point  a  given  expenditure  of  capi- 
tal and  labor  yields  a  diminishing  return. 

42.  Effect  of   Improvements. — It  was   also  seen 
that  this  tendency  to  a  diminished  return  and  the  rent 
consequent  therefrom  might  be  offset  by  all  causes, 
such  as  improvements   in  transportation,  etc.,  that 
tend  to  reduce  the  difference  in  cost  between  the  more 
efficient  and  the  least  efficient  or  marginal  land.     It 
was  further  seen  that  the  influences  that  tend  to  re- 
duce this  difference  in  cost  are  more  generally  real- 
ized in  manufactures  than  in  agriculture. 

It  appears,  then,  that  in  our  review  of  those  writers 
who  have  been  active  in  the  promulgation  of  the  doc- 
trine of  rent  we  should  look  for  some  recognition  of 
the  following  concepts : 

Differences  in  fertility  and  access  to  market,  or, 
better,  differences  in  efficiency  of  land. 


THE  RENT  OF   LAND.  89 

The  law  of  diminishing  return  and  the  effect  of 
improvements. 

Greatest  cost  determines  price  and  price  deter- 
mines rent.  This  last  contention,  that  price  deter- 
mines rent,  is,  in  brief,  the  doctrine  of  rent. 

II.    HISTORICAL  DEVELOPMENT  OF  THE  DOCTRINE  OF  RENT, 

43.  Adam  Smith. — It  is  not  difficult  to  find  iso- 
lated passages  in  "The  Wealth  of  Nations"  that 
seem  to  justify  the  claim  that  the  doctrine  of  rent, 
as  applied  to  land,  found  clear  and  explicit  state- 
ment at  the  hands  of  Adam  Smith.  In  the  first 
place,  he  clearly  recognizes  not  only  that  difference 
in  fertility  and  distance  from  the  market  are  sources 
of  rent,  but  that  these  are  offset  by  increased  facilities 
in  transportation.  (See  Book  I.  Chap.  XI.  Part  I.) 

Again,  he  writes :  "  Rent,  it  is  to  be  observed, 
therefore,  enters  into  the  composition  of  the  price  of 
commodities  in  a  different  way  from  wages  and  profit. 
High  or  low  wages  and  profit  are  the  cause  of  high 
or  low  price  ;  high  or  low  rent  is  the  effect  of  it.  It 
is  because  high  or  low  wages  and  profit  must  be  paid, 
in  order  to  bring  a  particular  commodity  to  market, 
that  its  price  is  high  or  low ;  but  it  is  because  its 
price  is  high  or  low,  a  great  deal  more,  or  very  little 
more,  or  no  more,  than  what  is  sufficient  to  pay  those 
wages  and  profit,  that  it  affords  a  high  rent,  a  low 
rent,  or  no  rent  at  all."  ("  The  Wealth  of  Nations," 
Book  I.  Chap.  XI.) 

But  while  Smith  seems  to  see  quite  clearly  that 


90  VALUE  AND   DISTRIBUTION. 

rent  does  not  enter  into  the  determination  of  price, 
he  is  not  so  clear  on  the  proposition  upon  which  in 
last  resort  the  law  of  rent  is  based, — namely,  that 
price  is  determined  by  the  greatest  or  marginal  cost 
of  production.  This  is  shown  in  the  following 
passage : 

"  As  the  price  both  of  the  precious  metals  and  of 
the  precious  stones  is  regulated  all  over  the  world  by 
their  price  at  the  most  fertile  mine  in  it,  the  rent 
which  a  mine  of  either  can  afford  to  its  proprietor  is 
in  proportion  not  to  its  absolute,  but  to  what  may  be 
called  its  relative  fertility,  or  to  its  superiority  over 
other  mines  of  the  same  kind."  ("  The  Wealth  of 
Nations,"  Book  I.  Chap.  XL  Part  II.) 

While  he  here  recognizes  that  the  rent  of  such 
mines  is  due  to  "  their  superiority  over  other  mines 
of  the  same  kind,"  he  confounds  the  argument  by 
saying  that  "  the  price  of  these  commodities  is  regu- 
lated all  over  the  world  by  their  price  at  the  most 
fertile  mines  in  it." 

44.  Criticism  of  Smith. — Passages  like  the  above 
led  those  who  immediately  followed  Smith  to  con- 
clude that  he  did  not  have  a  firm  grasp  upon  the 
doctrine  of  rent. 

Ricardo  writes  :  "  Adam  Smith  sometimes  speaks 
of  rent  in  the  strict  sense  to  which  I  am  desirous 
of  confining  it,  but  more  often  in  the  popular  sense 
in  which  the  term  is  usually  employed.  .  .  .  He  also 
speaks  of  the  rent  of  coal-mines  and  of  stone-quar- 
ries, to  which  the  same  observation  applies, — that  the 


THE  RENT  OF  LAND.  91 

compensation  given  for  the  mine  or  quarry  is  paid 
for  the  value  of  the  coal  or  stone  which  can  be  re- 
moved from  them,  and  has  no  connection  with  the 
original  and  indestructible  powers  of  the  land/'  * 

Malthus  writes :  "  Adam  Smith,  though  in  some 
parts  of  the  eleventh  chapter  of  his  first  book  he 
contemplates  rent  quite  in  its  true  light,  and  has 
interspersed  through  his  work  more  just  observations 
on  the  subject  than  any  other  writer,  he  has  not  ex- 
plained the  most  essential  cause  of  the  high  price  of 
raw  produce  with  sufficient  distinctness,  though  he 
often  touches  upon  it ;  and  by  applying  occasionally 
the  term  monopoly  to  the  rent  of  land,  without  stop- 
ping to  mark  its  more  radical  peculiarities,  he  leaves 
the  reader  without  a  definite  impression  of  the  real 
difference  between  the  cause  of  the  high  price  of  the 
necessaries  of  life  and  of  monopolized  commodities."-]* 

45.  Anderson. — The  first  to  give  us  a  full  and 
fairly  complete  statement  of  the  doctrine  of  rent  as 
applied  to  land  was  Dr.  James  Anderson,  who  in 
1777  published  a  tract  entitled  "An  Inquiry  into  the 
Nature  of  the  Corn  Laws."  In  this  he  writes  : J  "I 
foresee  here  a  popular  objection.  It  will  be  said 
that  the  price  to  the  farmer  is  so  high  only  on  ac- 
count of  the  high  rents  and  avaricious  extortions  of 

*  Ricardo's  Principles  of  Political  Economy,  Bohn  edition, 
p.  45. 

•(•  An  Inquiry  into  the  Nature  and  Progress  of  Rent,  p.  3. 

J  This  is  taken  from  the  abstract  in  Overtone's  reprint  of 
rare  tracts. 


92  VALUE  AND  DISTRIBUTION. 

proprietors.  '  Lower  (say  they)  your  rents,  and  the 
farmer  will  be  able  to  afford  his  grain  cheaper  to  the 
consumers.'  But  if  the  avarice  alone  of  the  pro- 
prietors was  the  cause  of  the  dearth  of  corn,  whence 
comes  it,  I  may  ask,  that  the  price  of  grain  is  always 
higher  on  the  west  than  on  the  east  coast  of  Scot- 
land? Are  the  proprietors  in  the  Lothians  more 
tender-hearted  and  less  avaricious  than  those  of 
Clyddesdale?  The  truth  is,  nothing  can  be  more 
groundless  than  these  clamours  against  men  of 
landed  property.  There  is  no  doubt  but  that  they, 
as  well  as  every  other  class  of  men,  will  be  willing 
to  augment  their  revenue  as  much  as  they  can,  and 
therefore  will  always  accept  of  as  high  a  rent  for 
their  land  as  is  offered  to  them.  Would  merchants 
or  manufacturers  do  likewise?  AVould  either  the 
one  or  the  other  of  these  refuse,  for  the  goods  he 
offers  for  sale  in  a  fair  open  way,  as  high  a  price  as 
the  purchaser  is  inclined  to  give  ?  If  they  would 
not,  it  is  surely  with  a  bad  grace  that  they  blame 
gentlemen  for  accepting  such  a  rent  for  their  land  as 
farmers,  who  are  supposed  always  to  understand  the 
value  of  it,  shall  choose  to  offer  them.  .  .  . 

"  //  is  not,  however,  the  rent  of  the  land  that  deter- 
mines the  price  of  its  produce,  but  it  is  the  price  of 
thai  produce  which  determines  the  rent  of  the  land. 

"  In  every  country  there  is  a  variety  of  soils,  dif- 
fering considerably  from  one  another  in  point  of 
fertility.  These  we  shall  at  present  suppose  ar- 
ranged into  different  classes,  which  we  shall  denote 


THE  RENT  OF  LAND.  93 

by  the  letters  A,  B,  C,  D,  E,  F,  etc. ;  the  class  A 
comprehending  the  soils  of  the  greatest  fertility,  and 
the  other  letters  expressing  different  classes  of  soils, 
gradually  decreasing  in  fertility  as  you  recede  from 
the  first.  Now,  as  the  expense  of  cultivating  the 
least  fertile  soil  is  as  great  as  or  greater  than  that 
of  the  most  fertile  field,  it  necessarily  follows  that  if 
an  equal  quantity  of  corn,  the  produce  of  each  field, 
can  be  sold  at  the  same  price,  the  profit  on  culti- 
vating the  most  fertile  soil  must  be  much  greater 
than  that  of  cultivating  the  others,  and  as  this  con- 
tinues to  decrease  as  the  sterility  increases,  it  must 
happen  that  the  expense  of  cultivating  some  of  the 
inferior  classes  will  equal  the  value  of  the  whole 
produce"  This  Anderson  assumes  to  be  the  case  in 
class  F,  and  concludes  that  "  the  utmost  avarice  of  the 
proprietor  cannot  in  this  case  extort  a  rent  from  this 
class."  Farmers  in  the  other  class  could  of  course 
afford  to  pay  a  rent.  "  Nor  would  the  proprietors  of 
these  fields  find  any  difficulty  in  obtaining  these 
rents ;  because  farmers,  finding  they  could  live 
equally  well  upon  such  soils,  though  paying  these 
rents,  as  they  could  upon  the  fields  without  any  rent 
at  all,  would  be  equally  willing  to  take  the  one  as 
the  other." 

"  Let  us  now  suppose  that  the  gentlemen  of  Clyd- 
desdale,  from  an  extraordinary  exertion  of  patriot- 
ism and  an  inordinate  desire  to  encourage  manufac- 
tures, should  resolve  to  lower  their  rents,  so  as  to 
demand  nothing  from  those  who  possessed  the  fields 


94  VALUE  AND  DISTRIBUTION. 

E,  as  well  as  those  of  the  class  F,  and  should  allow 
the  rents  of  all  the  others  to  sink  in  proportion ; 
would  the  prices  of  grain  fall  in  consequence  of  this  ? 
By  no  means.  The  inhabitants  are  still  in  need  of 
the  whole  produce  of  the  field  F  as  before,  and  are 
under  the  necessity  of  paying  the  farmer  of  these 
fields  such  a  price  as  to  enable  him  to  cultivate  them. 
He  must,  therefore,  still  receive  fourteen  shillings  per 
boll  as  formerly.  And  as  the  grain  from  the  fields 
E  D  C  B  and  A  are  at  least  equally  good,  the  occu- 
piers of  such  of  these  fields  would  receive  the  same 
price  for  their  produce.  The  only  consequence,  then, 
that  would  result  from  this  quixotic  scheme  would 
be  the  enriching  one  class  of  farmers  at  the  expense 
of  their  proprietors,  without  producing  the  smallest 
benefit  to  the  consumers  of  grain, — perhaps  the  re- 
verse, as  the  industry  of  these  farmers  might  be 
slackened  by  this  measure. 

"  If,  on  the  other  hand,  by  any  political  arrange- 
ment, the  price  of  oatmeal  should  be  then  reduced 
from  fourteen  to  thirteen  shillings  per  boll,  it  would 
necessarily  follow  that  all  the  fields  of  the  class  F 
would  be  abandoned  by  the  plough,  and  the  rents  of 
the  others  would  fall,  of  course ;  but  with  that  fall  of 
rent  the  quantity  of  grain  produced  would  be  dimin- 
ished, and  the  inhabitants  would  be  reduced  to  the 
necessity  of  depending  on  others  for  their  daily 
bread.  Thus  it  appears  that  rents  are  not  at  all 
arbitrary,  but  depend  on  the  market  price  of  grain ; 
which,  in  its  turn,  depends  upon  the  effective  de- 


THE  RENT  OF  LAND.  95 

mand  that  is  for  it,  and  the  fertility  of  the  soil  in 
the  district  where  it  is  raised :  so  thai  the  lowering 
of  rents  alone  could  never  have  the  effect  of  render- 
ing  the  grain  cheaper"  We  here  have  a  clear  rec- 
ognition of  the  two  essential  propositions  that  price 
is  determined  by  the  greatest  or  marginal  cost,  and 
that  price  determines  rent  instead  of  being  deter- 
mined by  rent.  So,  too,  in  this  first  elaboration  of 
the  doctrine  of  rent,  we  find  it  set  up  as  the  defence 
of  the  agrarian  interest  against  the  growing  demands 
of  the  manufacturing  interest. 

Despite  the  clear  enunciation  in  Anderson's  tract 
of  fundamental  concepts  involved  in  the  doctrine  of 
rent,  nearly  half  a  century  elapsed  before  this  doc- 
trine became  an  essential  part  of  economic  theory. 
It  was  not,  indeed,  until  1815  that  Malthus,  in  "  An 
Inquiry  into  the  Nature  and  Progress  of  Rent,"  and 
Sir  Edward  West,  in  his  essay  on  "  The  Application 
of  Capital  to  Land,''  developed  quite  independently 
of  each  other  and  of  Anderson  the  modern  doctrine 
of  the  rent  of  land. 

46.  Malthus. — This  writer  held  that  "  The  reason 
why  the  real  price  of  corn  is  higher  and  continually 
rising  in  countries  which  are  already  rich,  and  still 
advancing  in  prosperity  and  population,  is  to  be 
found  in  the  necessity  of  resorting  constantly  to 
poorer  land."  (Page  44.)  "  The  price  of  produce  in 
every  progressive  country  must  be  just  about  equal 
to  the  cost  of  production  on  land  of  the  poorest  quality 
in  use ;  or  to  the  cost  of  raising  additional  produce 


96  VALUE  AND  DISTRIBUTION. 

on  old  land,  which  yields  only  the  usual  return  of 
agriculture  stock,  with  little  or  no  rent."  (Page  35.) 
"  There  is  no  just  reason  to  believe  that  if  landlords 
were  to  give  the  whole  of  their  rents  to  their  tenants 
corn  would  be  more  plentiful  and  cheaper."  (Page 
57.)* 

Differences  in  fertility  and  distance  from  market 
are  here  clearly  recognized  as  sources  of  rent.  So, 
too,  the  propositions  that  greatest  cost  determines 
price  and  price  determines  rent.  Again,  the  laws  of 
Increasing  and  Diminishing  Return  are  clearly  ap- 
prehended by  Mai  thus.  For  he  writes  :  "  Many  of 
the  questions,  both  in  Morals  and  Politics,  seem  to  be 
of  the  nature  of  the  problem  de  maximis  and  minimis 
in  Fluxions ;  in  which  there  is  always  a  point  where 
a  certain  effect  is  the  greatest,  while  on  either  side 
of  this  point  it  gradually  diminishes."  ("  Tract  on 
the  Effects  of  the  Corn  Laws,"  p.  32.) 

47.  West. — Sir  Edward  West's  formulation  of  the 
doctrine  of  rent  differs  but  little  from  that  just  ex- 
amined. 

West  writes :  "  When  in  the  progress  of  improve- 
ment new  land  is  brought  into  cultivation  recourse 
is  necessarily  had  to  poor  land,  or  to  that  at  least 
which  is  second  in  quality  to  what  is  already  culti- 
vated." (Page  9.) 

Again,  "  The  additional  work  bestowed  on  land 
must  be  expended  either  in  bringing  fresh  land  into 

*An  Inquiry  into  the  Nature  and  Progress  of  Rent. 


THE  RENT  OF  LAND.  97 

cultivation  or  in  cultivating  more  highly  that  already 
in  tillage.  In  every  country  the  gradations  between 
the  richest  land  and  the  poorest  must  be  innumer- 
able. The  richest  land,  or  that  most  conveniently 
situated  for  a  market,  will,  of  course,  be  cultivated 
first."  (Page  9.) 

"  It  is  the  diminishing  rate  of  return  upon  ad- 
ditional portions  of  capital  bestowed  on  land  that 
regulates,  and  almost  solely  causes  rent."  (Page 
49.)  "  The  corn  that  is  raised  at  the  least  expense 
will,  of  course,  sell  for  the  same  price  as  that  raised 
at  the  greatest,  and  consequently  the  price  of  all  corn 
is  raised  by  the  increased  demand.  But  the  farmer 
gets  only  the  common  profits  of  stock  in  its  growth, 
which  is  afforded  in  that  corn  which  is  raised  at  the 
greatest  expense ;  all  the  additional  profit,  therefore, 
on  that  part  of  the  produce  which  is  raised  at  a  less 
expense  goes  to  the  landlord  in  the  shape  of  rent." 
(Page  50.) 

It  is  manifest  that  West,  like  Malthus,  recognizes 
all  of  the  fundamental  conceptions  involved  in  the 
modern  doctrine  of  rent  as  applied  to  land.  Differ- 
ence in  fertility  and  distance  from  market,  the  law 
of  Diminishing  Returns,  and  the  effect  of  improve- 
ments are  clearly  set  forth,  while  the  propositions 
that  price  is  determined  by  the  greatest  cost  and  that 
rent  is  determined  by  price  are  clearly  enunciated. 

48.  Ricardo. — Ricardo,  whose  "  Principles"  ap- 
peared shortly  after  the  above  papers  by  Malthus 
and  West,  recognized  the  importance  of  their  con- 


98  VALUE  AND  DISTRIBUTION. 

elusions,  and  hastened  to  embody  them  in  his  system 
of  distribution.  In  determining  the  cause  of  rent 
he  follows  the  above  writers  very  closely :  "  The 
most  fertile  and  most  favorably  situated  land  will 
be  first  cultivated."  (Page  49.)  "If,  then,  good 
land  existed  in  a  quantity  much  more  abundant  than 
the  production  of  food  for  an  increasing  population 
required,  or  if  capital  could  be  indefinitely  employed 
without  a  diminished  return  on  the  old  land,  there 
could  be  no  rise  of  rent."  (Page  49.) 

Again,  he  writes  :  "  Raw  material  enters  into  the 
composition  of  most  commodities,  but  the  value  of 
that  raw  material,  as  well  as  corn,  is  regulated  by 
the  productiveness  of  the  portion  of  capital  last  em- 
ployed on  the  land  and  paying  no  rent ;  and  there- 
fore rent  is  not  a  component  part  of  the  price  of 
commodities."  (Page  55.) 

He  also  gives  us  the  following  statement,  in  which 
the  conditions  under  which  rent  arises  are  couched 
in  the  most  general  terms  :  "  Rent  is  always  the  dif- 
ference between  the  produce  obtained  by  the  em- 
ployment of  two  equal  quantities  of  capital  and 
labor." 

Ricardo  added  but  little  to  the  doctrine  of  rent  as 
formulated  by  Malthus  and  West ;  he,  however,  em- 
bodied it  in  a  scheme  of  distribution  that  was  ac- 
cepted by  English  economists  for  many  years  after 
the  publication  of  his  "  Principles,"  and  so  from  this 
time  on  we  hear  only  of  Ricardo's  law  of  rent,  while 
the  belief  that  in  the  cost  of  production  we  have  the 


THE  RENT  OF  LAND.  99 

true  and  only  measure  of  value  became  even  more 
firmly  riveted  upon  the  body  of  economic  theory. 

49.  Criticisms  of  Ricardo. — For  more  than  half 
a  century  after  the  publication  of  Ricardo's  "  Prin- 
ciples" English  literature  was  well-nigh  barren  of 
any  valuable  contribution  to  the  doctrine  of  rent. 
Specific  statements  of  Ricardo  were  objected  to,  and 
the  objections  sometimes  sustained.  For  instance,  his 
contention  that  the  most  fertile  and  most  favorably 
situated  land  will  be  first  cultivated  does  not  agree 
with  the  facts  as  we  find  them  in  the  settling  of  a 
new  country,  for  men  are  frequently  forced  to  culti- 
vate the  less  fertile  land  of  the  hill-side  until  capital 
has  accumulated  to  allow  them  to  drain  the  more 
fertile  bottom  lands. 

Again,  he  writes :  "  Rent  is  that  portion  of  the 
produce  of  the  earth  which  is  paid  to  the  landlord 
for  the  use  of  the  original  and  indestructible  powers 
of  the  soil."  (Page  44.)  This  contention  has  been 
attacked  on  the  ground  that  the  only  original  and 
indestructible  powers  of  the  soil  are  the  area  on 
which  to  expose  soil  and  plants  to  air,  water,  and 
sunshine,  and  it  is  agreed  that  in  this  sense  land  is 
so  abundant  that  it  could  have  no  value.  (See 
Clark,  Quarterly  Journal  of  Economics,  1891.) 

Ricardo's  phrase,  "  the  original  and  indestructible 
powers  of  the  soil,"  is  certainly  far  from  happy  ;  it  is, 
however,  capable  of  a  more  liberal  interpretation 
than  that  given  in  this  criticism.  What  Ricardo 
intended  to  say  was  that  before  rent  can  arise  not 


100  VALUE  AND  DISTRIBUTION. 

only  the  cost  of  production  must  be  met,  but  also  the 
cost  of  maintaining  the  land  unimpaired  in  its  fer- 
tility. Where  this  last  deduction  is  not  made  the 
payment,  as  in  the  case  of  mines,  is  a  royalty  and  not 
a  rent.  It  is,  indeed,  in  this  very  connection  that 
Bicardo  employed  the  terms  to  which  Clark  objects. 
He  writes :  "  Compensation  given  for  the  mine  or 
quarry  is  paid  for  the  value  of  the  coal  or  stone 
which  can  be  removed  from  them,  and  has  no  con- 
nection with  the  original  and  indestructible  powers 
of  the  land." 

Even  the  fundamental  condition  of  a  rent,  that  it 
does  not  enter  into  the  determination  of  price. but  is 
determined  by  price,  has  not  escaped  attack.  In- 
deed, so  able  a  defender  of  the  Eicardian  faith  as  J. 
S.  Mill  has  yielded  to  the  attack  at  this  point.  He 
writes :  "  Rent  is  not  an  element  in  the  cost  of  pro- 
duction of  the  commodity  which  yields  it ;  except  in 
the  case  (rather  conceivable  than  actually  existing) 
in  which  it  results  from  and  represents  a  scarcity 
value.  But  when  land  capable  of  yielding  rent  in 
agriculture  is  applied  to  some  other  purpose,  the  rent 
which  it  would  have  yielded  is  an  element  in  the  cost 
of  production  of  the  commodity  which  it  is  employed 
to  produce."  (Book  III.  Chap.  VI.) 

This  is  a  practical  admission  of  the  claim  of  Bi- 
cardo's  critics  that  there  is  no  such  thing  as  a  no-rent 
land.  If  this  is  true,  it  follows  that  rent  does  enter 
into  the  determination  of  price.  In  other  words,  the 
law  of  rent  is  completely  nullified.  In  Book  II., 


THE  RENT  OF  LAND.  101 

Chapter  II.,  this  statement  of  Mill,  and  likewise  the 
contention  that  there  is  no  no-rent  land,  will  be  ex- 
amined at  some  length. 

For  the  present  I  would  urge  that  we  must  either 
dismiss  the  doctrine  of  rent  as  part  of  the  antiquated 
lumber  of  our  intellectual  furnishing  or  hold  fast  to 
the  proposition  that  rent  is  that  surplus  which  does 
not  enter  into  the  determination  of  price,  but  is  de- 
termined by  price. 


CHAPTEE  II. 

THE  GENERAL,  DOCTRINE  OF  RENT. 

I.    THE  DOCTRINE  IN  ENGLISH  ECONOMICS. 

THE  earlier  English  economists  restricted  them- 
selves almost  entirely  to  a  discussion  of  the  doctrine 
of  rent  as  applied  to  land.  And  yet  from  the  very 
inception  of  the  doctrine  men  recognized  that  its  pri- 
mary and  essential  condition  is  that  it  does  not  enter 
into  the  determination  of  price  but  is  determined  by 
price.  From  this  it  is  not  far  to  the  further  conclu- 
sion that  wherever  such  a  surplus  arises,  whether  in 
connection  with  land,  labor,  capital,  or  entrepreneur, 
we  have  a  rent  of  the  corresponding  factor  of  produc- 
tion. And  yet,  despite  the  ease  with  which  this 
further  step  in  the  argument  may  be  taken,  it  was 
long  delayed  among  English  economists.  Here  and 
there  we  find  an  occasional  reference  to  this  general 
doctrine,  but  it  was  not  until  the  last  quarter  of  the 
present  century  that  it  found  any  general  accept- 
ance. 

50.  Whately  on  the  General  Doctrine  of  Rent. — 
This  writer  took  occasion  to  declare  that  the  rent  of 
land  is  only  one  species  of  an  extensive  genus,  and 
complained  that  English  economists  have  regarded  it 

as  a  genus  by  itself,  and  have  either  omitted  its  cog- 
102 


THE  GENERAL  DOCTRINE   OF  RENT.  103 

nate  species  from  all  consideration  or  have  included 
them  under  genera  to  which  they  do  not  properly 
belong.  But  beyond  entering  this  general  complaint 
the  Archbishop  makes  no  further  contribution  to  the 
literature  of  the  subject. 

51.  J.  S.  Mill  on  the  General  Doctrine  of  Rent. — 
Mill  writes :  "  Cases  of  extra  profit  analogous  to  rent 
are  more  frequent  in  the  transactions  of  industry  than 
is  sometimes  supposed.  Take  the  case,  for  example, 
of  a  patent  or  exclusive  privilege  for  the  use  of  a 
process  by  which  cost  of  production  is  lessened.  If 
the  value  of  the  product  continues  to  be  regulated 
by  what  it  costs  to  those  who  are  obliged  to  persist 
in  the  old  process,  the  patentee  will  make  an  extra 
profit  equal  to  the  advantage  which  his  process  .pos- 
sesses over  theirs.  This  extra  profit  is  essentially 
similar  to  rent,  and  sometimes  even  assumes  the  form 
of  it;  the  patentee  allowing  to  other  producers  the 
use  of  his  privilege  in  consideration  of  an  annual 
payment.  .  .  . 

"  The  extra  gains  which  any  producer  or  dealer 
obtains  through  superior  talents  for  business,  or  su- 
perior business  arrangements,  are  very  much  of  a 
similar  kind.  If  all  his  competitors  had  the  same  ad- 
vantages, arid  used  them,  the  benefit  would  be  trans- 
ferred to  their  customers,  through  the  diminished 
value  of  the  article :  he  only  retains  it  for  himself 
because  he  is  able  to  bring  his  commodity  to  market 
at  a  lower  cost,  while  its  value  is  determined  by  a 
higher.  All  advantages,  in  fact,  which  one  competi- 


104  VALUE  AND  DISTRIBUTION. 

tor  has  over  another,  whether  natural  or  acquired, 
whether  personal  or  the  result  of  social  arrange- 
ments, bring  the  commodity,  so  far,  into  the  Third 
Class,  and  assimilate  the  possessor  of  the  advantage 
to  a  receiver  of  rent."  (Appleton  edition,  pp.  585, 
586.) 

While  this  is  far  from  a  happy  statement  of  the 
case,  yet  it  clearly  recognizes  the  general  character 
of  the  rent  function. 

52.  Walker  on  the  Rent  of  Entrepreneur. — That 
Walker  has  shown  that  the  entrepreneur  performs  as 
distinct  and  important  a  service  as  capital  or  labor 
will  hardly  be  questioned ;  but  what  interests  us 
most  in  this  connection  is  his  claim  that  the  return 
secured  by  the  entrepreneur  follows  the  law  of  rent. 
He  writes:  "I  shall  now  undertake  to  show  that 
profits,  the  remuneration  of  the  entrepreneur  or 
employer,  partake  largely  of  the  nature  of  rent, 
being  a  species  of  the  same  genus.  So  far  as  this  is 
the  case,  profits  do  not  form  a  part  of  the  price  of 
the  products  of  industry."  ("  Political  Economy," 
1888,  p.  236.)  As  we  shall  have  occasion  to  review 
this  writer's  contribution  to  this  part  of  economic 
theory  at  some  length  in  another  chapter  (see  page 
135),  a  very  brief  notice  at  this  point  will  be  suffi- 
cient. In  conclusion,  we  can  only  express  regret 
that  he  did  not  follow  his  argument  to  its  legitimate 
conclusion,  and  call  the  return — which  confessedly 
follows  the  law  of  rent — the  rent  of  the  entre- 
preneur. 


THE  GENERAL  DOCTRINE  OF  RENT.  105 

53.  Marshall  on  the  Rent  of  Capital. — This  rent, 
though  now  and  again  incidentally  noticed  in  Eng- 
lish literature,  receives  its  first  full  enunciation  at 
the  hands  of  Professor  Marshall.  He  writes  :  "  Let 
us  suppose,  then,  that  an  exceptional  demand  for  a 
certain  kind  of  textile  fabric  is  caused  by,  say,  a 
sudden  movement  of  the  fashions.  The  special  ma- 
chinery required  for  making  that  fabric  will  yield 
for  the  time  an  income  which  bears  no  direct  rela- 
tion to  the  expenses  of  making  the  machinery ;  but 
is  rather  a  high  Quasi-rent  governed  by  the  price 
that  can  be  got  for  the  produce,  and  consisting  of  the 
excess  of  the  aggregate  price  of  that  produce  over 
the  direct  outlay  (including  wear  and  tear)  incurred 
in  its  production.  .  .  . 

"  Meanwhile  such  of  the  old  machinery  as  is  in 
good  repair  may  perhaps  be  kept  at  work ;  but  the 
income  which  it  earns  will  bear  no  direct  relation  to 
its  own  expenses  of  production ;  it  will  be  the  small 
excess  of  the  selling  value  of  the  produce  made  by 
it  over  the  wear  and  tear  and  other  direct  outlay 
involved ;  this  income  will  be  a  Quasi-rent,*  the 
value  of  which  will  be  determined  by  the  price  of 

*  Marshall  accents  the  greater  permanence  of  land  rent, 
and  so  calls  the  differential  earnings  of  capital  "  Quasi-rent." 
Many  German  economists,  on  the  other  hand,  regard  every 
differential  gain  as  an  unqualified  rent  without  regard  to  its 
duration.  As  a  matter  of  fact,  the  rent  of  land  is  only  a  little 
more  permanent,  as  the  recent  reduction  in  rents,  because  of 
improvements  in  transportation,  abundantly  testify. 


VALUE   AND   DISTRIBUTION. 

the  produce,  and  play  no  direct  part  in  determining 
that  price.  .  .  . 

"  Similar  illustrations  might  be  taken  from  any 
other  branch  of  business.  Each  branch  has  special 
features  of  its  own ;  but  with  proper  modifications  in 
detail  the  same  general  principle  applies  to  all.  In 
every  case  the  net-income  derived  from  the  invest- 
ment of  capital,  when  once  that  investment  has  been 
made,  is  a  Quasi-rent."  (Marshall's  "  Principles  of 
Economics,"  pp.  469-471.) 

54.  Clark  and  Hobson  on  the  General  Doctrine 
of  Rent. — In  the  magazine  literature  of  more  recent 
years  there  is  a  growing  tendency  to  regard  rent  as  a 
general  function,  or  as  a  surplus  that  may  be  realized 
by  any  and  all  factors  of  production.  Indeed,  there 
is  some  danger  that  its  application  will  be  extended 
beyond  its  legitimate  limits.  This  is  notably  the  case 
with  an  article  by  J.  B.  Clark  in  the  Quarterly  Jour- 
nal of  Economics,  1891,  under  the  caption  of  "  Dis- 
tribution determined  by  a  Law  of  Rent."  In  this 
Clark  seeks  to  show  that  even  the  interest  on  capital 
and  the  wages  of  labor  follow  the  law  of  rent. 
That  both  capital  and  labor  may  secure  a  differential 
return  or  a  rent  is,  of  course,  admitted.  Clark, 
however,  seems  to  hold  that  the  minimum  rate  of 
interest  or  the  earnings  of  capital  as  an  abstract 
fund- — to  use  his  own  phrase — is  a  differential  gain 
or  a  rent.  As  his  completed  work  will  shortly  ap- 
pear, criticism  at  this  time  would  hardly  be  in  order. 
In  the  same  volume  of  the  Quarterly  Journal  of 


THE  GENERAL  DOCTRINE  OF  RENT.  107 

Economics  there  is  an  article  by  J.  H.  Hobson  on 
"  The  Law  of  the  Three  Rents/'  which  seems  like- 
wise to  give  a  very  wide  range  to  the  doctrine  of 
rent.  This  will  be  examined  in  a  later  chapter. 

II.    THE  DOCTRINE  IN  GERMAN  ECONOMICS. 

55.  Busch  on  the  Rent  of  Labor. — This  writer  in- 
forms us  that  "  not  only  special  talent  and  ability 
have  this  distinction,  but  even  the  laborer  who  is 
presumed  to  have  mere  bodily  strength  attains  to  a 
skill  which  gives  him  a  gain  in  the  same  way  as 
talent.  Nor  can  this  be  regarded  as  a  return  for  the 
time  during  which  he  was  acquiring  this  skill,  be- 
cause during  that  time  he  received  all  his  skill  could 
command  or  was  paid  for  his  total  effect.  So  the 
old  experienced  seaman  does  not  work  harder  than 
the  new  beginner,  and  yet  he  gets  higher  wages, 
because  he  knows  the  parts  of  the  ship  better,  and 
so  can  more  quickly,  surely,  and  properly  obey  the 
commands  of  the  officers.  So  in  agriculture  the  ex- 
perienced ploughman  is  better  paid  than  the  inex- 
perienced. So,  too,  in  stores  the  more  skilful  packer 
is  paid  better  than  the  unskilled,  though  both  use 
equal  strength,  and  also  in  some  positions  greater 
honesty  will  command  higher  pay.  If  it  was  worth 
the  trouble  to  be  very  exact  in  the  matter,  one  could 
even  contest  whether  wages-gain  (Arbeiterslohn-Ge- 
winn)  is  rightly  so  characterized,  for  it  can,  at  least 
in  part,  be  regarded  as  a  rent  of  the  mere  skill  of 
labor,  for  though  the  rent  is  so  insignificant,  yet  the 


108  VALUE   AND  DISTRIBUTION. 

incapable  laborers  cannot  draw  it."  We  here  have 
a  clear  recognition  of  a  rent  of  labor,  and  that  as 
early  as  1800.* 

56.  Hufeland  on  the  General  Doctrine  of  Rent.f 
— Writing  some  seven  years  later,  Hufeland  quotes 
with  approval  Busch's  remarks  about  the  rent  of 
labor.  He,  however,  goes  much  farther  than  Busch, 
and  attempts  to  show  that  the  doctrine  of  rent  is  ap- 
plicable to  all  the  factors  of  production. 

(a)  RENT  OF  LAND. — In  his  discussion  of  this 
rent  Hufeland  clearly  recognizes  that  it  depends  upon 
differences  in  fertility  and  distance  from  the  mar- 
ket. He  also  sees  that  "the  ground-rent  depends, 
much  more  than  hitherto  considered  gains,  upon  the 
market  price  of  the  product.  It  does  not  contain, 
like  wages  and  capital,  some  principle  for  the  deter- 
mination of  the  price,  whereby  these  latter  can  be 
the  cause  of  the  price,  for  out  of  these,  as  is  well 
known,  the  price  of  corn  is  formed,  since  they  in  their 
repair  must  receive  a  definite  amount,  and  may  even, 
upon  this  amount,  obtain  a  proportional  gain  before 
the  rent  is  paid.  The  ground-rent  is  entirely  want- 
ing in  this  fundamental  determining  quantity ;  it  can 
only  wait  for  what  remains  for  it.  The  laborer  and 
capitalist  can  first  obtain  not  only  their  cost,  but  also 
their  share  of  the  gain,  because  when  the  gain  is  not 


*  John  George  Busch,  "  Abhandlung  von  dem  Gelduralauf," 
second  edition,  1800. 

f  "Neue  Grundlegung  der  Staatswirthakunst,"  1807. 


THE  GENERAL   DOCTRINE  OF  RENT.  1Q9 

high  enough  they  can  go  elsewhere  to  find  employ- 
ment, but  the  landlord  must  wait  for  his  rent,  be- 
cause at  best  he  can  only  allow  his  land  to  lie  idle. 
Therefore,  out  of  the  market  price  comes  first  the 
wages  and  then  the  capital  gain  with  some  certainty, 
and  the  ground-rent  is  the  least  assured.  If  the 
market  price  sinks,  the  landlord  must  be  the  first  to 
lose." 

(b)  RENT  OF  CAPITAL. — In  his  discussion  of  this 
rent  Hufeland  is  not  very  happy.     He  nowhere  suc- 
ceeds in  showing  a  gain  due  to  a  differential  advan- 
tage in  production.     In  other  words,  he  only  gives  us 
a  formal  and  not  an  actual  recognition  of  this  rent. 

(c)  KENT  OF  LABOK. — Hufeland  quotes  the  pre- 
ceding paragraph  from  Busch,  but  does  not  make  any 
substantial  addition  to  this  part  of  the  discussion. 

(d)  RENT  OF  UNTERNEHMER. — In  his   treatment 
of  this  rent  he  writes  (paragraph  72)  :  "  He  who  ap- 
plies or  employs  capital  may  be  the  owner  of  the 
capital,  or  he  may  employ  the  capital  of  others. 

"  He  who  employs  the  capital  is  the  Unternehmer, 
the  owner  of  the  capital  is  the  capitalist,  and  the  re- 
turn which  the  Unternehmer  receives  is  called  the 
'  Unternehmungsgewinn/ 

"  The  '  Unternehmungsgewinn'  is  the  surplus  after 
abstracting — 

"  1.  Wages  with  gain. 

"  2.  Repair  of  capital. 

"  3.  Repair  for  risk  of  capital. 

"  4.  '  Capitalgewinn'  or  interest. 


HO  VALUE   AND   DISTRIBUTION. 

"  The  balauce  comes  to  the  Unternehmer,  and  is 
partly  a  gain  which  he  draws  because  of  the  greater 
risk  which  he  incurs,  and  partly  a  rent  for  his  talent 
or  other  mental  qualities.  And  so  it  is  in  the  class  of 
successful  Unternehmers  that  the  greatest  wealth  is 
gained.  The  rent  for  the  talent  and  other  qualities 
has  no  limit,  because  men  of  this  sort  are  scarce." 

Again,  paragraph  76,  "  There  are  certain  natural 
conditions  without  which  production  is  impossible. 
These  are  derived  from  nature  alone,  and  are  more  or 
less  rare.  The  possessor  of  them  can  deny  their  use 
to  others  unless  they  pay  him  for  it.  But  what  he 
receives  is  no  repair  or  indemnification  for  any  ser- 
vice he  has  rendered,  because  he  has  rendered  none ; 
it  is  pure  gain,  pure  rent. 

"  To  these  natural  sources  of  wealth  belong  two 
classes : 

"  1.  Human  talent,  capability,  qualities  of  mind, 
heart,  and  character. 

"  2.  The  land  or  soil." 

He  then  goes  on  to  remark  "  that  hitherto  only  the 
last  sort  has  been  so  regarded,  and  that  now  for  the 
first  time,  through  the  addition  of  the  first  sort,  the 
conception  of  the  matter  has  been  made  more  gen- 
eral." 

He  then  refers  to  Say  as  having  some  foreshadow- 
ing of  this,  and  marvels  that  he  did  not  recognize  the 
general  concept. 

It  is  true,  Hufeland  does  not  enter  into  that  de- 
tailed discussion  of  the  function  and  qualifications  of 


THE  GENERAL  DOCTRINE  OF   RENT. 

the  Unternelimer  which  we  find  in  later  writers,  but 
that  the  Unternehmer  receives  a  return  because  of 
his  differential  advantage,  or  that  with  equal  pain,  in 
the  effort  of  production,  there  was  an  unequal  re- 
turn, and  so  a  rent,  an  unearned  increment,  he  most 
clearly  and  explicitly  recognized. 

It  is  also  interesting  to  note  that  in  his  discus- 
sion of  the  subject  he  proceeds  in  the  following 
order : 

1.  Rent  of  Fixed  Capital. 

2.  Rent  of  Skill  and  Talent. 

3.  Rent  of  Land. 

Or  so  clearly  did  he  recognize  the  breadth  and 
generality  of  the  doctrine  of  rent  that  he  discusses 
all  other  applications  of  the  doctrine  before  proceed- 
ing to  the  consideration  of  land-rent. 

57.  Mangoldt  on  the  General  Doctrine  of  Rent. — 
From  1807  to  1855  the  general  doctrine  of  rent  had, 
in  German  economics,  a  somewhat  varied  career. 
Some  writers,  like  Rau,  who  were  strongly  impressed 
by  Ricardian  economics,  failed  entirely  to  see  any 
general  doctrine  of  rent.  Others,  like  Herman  and 
Nebenius,  had  more  or  less  of  a  grasp  of  the  idea 
that  rent  is  a  general  function  common  to  all  factors 
of  production.  It  was  not,  however,  until  Mangoldt  * 
published  in  1855  that  we  find  a  full  and  complete 
exposition  of  the  doctrine  as  applied  to  all  factors  of 
production. 

*  "  Die  Lehre  von  UnternchmtingHgewinn,"  1855. 


112  VALUE  AND  DISTRIBUTION. 

(a)  RENT  OF  LAND. — While  Mangoldt  recognizes 
the  part  played  by  difference  in  fertility  and  dis- 
tance from  market,  etc.,  he  does  not  elaborate  this 
part  of  the  discussion  or  add  anything  to  that  which 
has  already  been  well  said  by  others.     He  seems  to 
think  that,  so  far  as  this  rent  is  concerned,  the  evi- 
dence is  all  in  and  the  case  closed. 

(b)  RENT  OF  CAPITAL. — In  his  discussion  of  the 
rent  of  capital  we  have  a  distinct  advance  upon  all 
previous  contributions.     For  while  the  formal  recog- 
nition of  this  rent  which  we  found  in  Hufeland  re- 
curs  again   and   again  in  German  economics,  it  is 
always  equated  to  some  disadvantage  in  production, 
to  risk,  etc.    Here  for  the  first  time  it  is  equated  to  a 
differential  advantage  in  production,  or  to  the  superi- 
ority of  certain  forms  of  capital  in  the  production  of 
a  given  commodity.     In  this  connection  Mangoldt 
writes  :  "  This  interest-rent  is  not  drawn  by  all  forms 
of    capital   equally,   any   more   than   wages-rent   is 
drawn  by  all  who  are  capable  of  working.      It  is 
only  the  surplus  which  a  certain  form  of  capital 
draws  in  excess  of  the  general  rate  of  interest.  .  .  . 
The  reason  why  a  certain  form  of  capital  yields  this 
extra  return  is  either  the  scarcity  of  its  kind  or  the 
scarcity  of  its  extent  or  amount. 

"If  capital  of  a  certain  kind  is  either  uncondi- 
tionally necessary  to  the  production  of  a  commodity, 
or  can  only  be  replaced  by  a  less  satisfactory  substi- 
tute, it  begins  to  give  an  interest-rent  as  soon  as  the 
demand  for  the  commodity  for  whose  production  it 


THE  GENERAL  DOCTRINE  OF  RENT. 

serves  is  so  strong  that  the  supply  at  existing  prices 
is  not  sufficient  to  satisfy  it." 

(<?)  RENT  OF  LABOR. — In  his  discussion  of  the 
rent  of  labor  Mangoldt  is  not  always  clear  that  it  is 
a  differential  gain.  He  does,  however,  clearly  see 
that  it  is  due  to  some  advantage  in  production  which 
certain  laborers  possess  over  others.  He  writes, 
"  When  we  speak  of  a  rent  of  personal  ability,  or  of 
a  wages-rent,  we  do  not  mean  the  surplus  of  the 
product  of  labor  over  the  absolutely  necessary  meas- 
ure, nor  a  surplus  over  a  pretended  natural  measure 
of  wages.  Wages-rent  is  to  us  an  extra  amount 
which  certain  performances  obtain  beyond  the  meas- 
ure belonging  to  them  when  their  quantity  and 
quality  is  compared  with  other  performances.  Hence 
it  results  that  not  labor  in  general,  but  only  certain 
sorts  of  labor,  draw  a  rent." 

He  finds  that  this  rent  is  due  to  two  causes  :  First. 
Legal  and  other  external  restriction  which  prevent 
the  free  movement  of  laborers  from  one  trade  or 
occupation  to  another.  Second.  Differences  in  nat- 
ural or  acquired  ability.  With  regard  to  the  latter 
he  writes :  "  When  we  turn  to  the  inner  reasons 
of  a  wages-rent,  that  is,  to  the  real  actual  want  of 
persons  possessed  of  the  required  ability,  we  find  that 
the  lower  the  order  of  the  ability  demanded  in  a 
certain  performance,  and  so  the  more  widely  diffused 
this  ability  is,  the  less  the  wages-rent.  Hence,  as  a 
rule,  the  mere  physical  labor  can  reckon  less  upon  a 
rent  than  the  more  intellectual.  Yet  this  may  be 

8 


VALUE  AND  DISTRIBUTION. 

otherwise  when  in  any  nation  the  intellectual  de- 
velopment is  at  the  expense  of  the  physical,  as 
usually  happens  in  periods  of  decline.  The  greater 
the  outlay  in  time,  strength,  or  money  in  the  acquisi- 
tion of  skill  or  ability  the  easier  and  more  certainly 
is  a  wage-rent  obtained.  This  is  the  reason  why 
pre-eminent  gifts  or  education  almost  always  receive 
very  high  pay.  The  rent  in  this  case  is  due  less 
to  the  scarcity  of  the  improved  natural  talents  than 
to  the  education.  An  extreme  extension  of  the  di- 
vision of  labor  results  frequently,  though  only  tem- 
porarily, in  a  wages-rent,  because  it  develops  one- 
sided skill,  and  so  makes  difficult  the  transition  from 
one  occupation  to  another.  In  industries  that  are 
subjected  to  great  variations  there  occurs  not  infre- 
quently a  wages-rent,  because  the  sudden  increase  in 
demand  compels  the  employment  of  those  who  are 
unskilled." 

(d)  RENT  OF  UNTERNEHMER. — In  this  connec- 
tion Mangoldt  writes :  "  The  Unternehmer's  rent  does 
not  cause  an  increase  in  the  price  of  products ;  .  .  . 
it  is  true  the  Unternehmer's  rent,  like  all  other  rents, 
can  arise  only  when  the  price  of  the  product  is 
higher  than  the  cost,  but  this  is  not  the  consequence 
of  the  Unternehmer's  rent.  It  depends  rather  upon 
the  scarcity  of  certain  productive  elements,  and 
whereas  in  other  rents  the  owners  of  the  rare  ele- 
ment, be  they  undertakers  or  not,  draw  the  advan- 
tage, here  it  comes  only  to  the  Unternehmer.  That 
it  is  the  Unternehmer,  in  whose  favor  such  a  scarcity 


THE  GENERAL  DOCTRINE  OF  RENT.  H5 

appears,  does  not  in  any  way  alter  its  importance  or 
effect." 

From  this  he  is  led  to  conclude  that  it  would  not 
only  be  unjust,  but  also  impractical,  useless,  and  un- 
wise to  attempt  to  limit  the  Unternehmer's  rent, 
arising  from  extraordinary  personal  ability,  "  because, 
in  the  first  place,  it  would  not  decrease  prices,  and  in 
the  second,  it  would  render  the  Unternehmer  averse 
to  making  an  increased  effort.  v 

"  There  only  remains,  therefore,  for  such  interfer- 
ence those  cases  where  the  natural  relations  grant  to 
certain  Unternehmers  a  lasting  monopoly.  Whether 
such  cases  really  exist  is  to  be  considered  with  great 
carefulness.  If  the  answer  is  in  the  affirmative, 
then  of  all  measures  in  the  public  interest  those  are 
to  be  selected  which  interfere  the  least  with  the  effi- 
ciency of  the  Unternehmer.  For  upon  this  the 
cheapening  of  production  largely  depends.  Only  in 
the  most  extreme  cases  can  the  abolishing  of  the 
Unternehmer 's  mode  of  conducting  business  be  justi- 
fied." 

It  is  impossible  to  condense  a  volume  such  as  this 
within  the  limits  of  two  or  three  pages.  It  is,  how- 
ever, clear  that  we  here  have  an  explicit  recognition 
of  rent  as  a  general  function,  common  to  all  the 
factors  of  production.  So,  too,  the  functions  of  the 
Unternehmer  are  recognized ;  that  he  receives  a  re- 
turn which  is  essentially  of  the  nature  of  a  rent; 
which,  to  use  the  author's  own  words,  should  be 
called  the  rent  of  the  Unternehmer. 


116  VALUE  AND  DISTRIBUTION. 

58.  Schaffle  on  the  General  Doctrine  of  Rent. — 
Writing  in  1869,  this  author  refers  to  Mangoldt  as 
agreeing  with  him  in  the  contention  that  rent  is  a 
general  function. 

Schaffle  writes  :  "  I  have  especially  to  thank  Man- 
goldt, who  in  his  '  Grundriss'  in  the  most  conscien- 
tious way  cites  my  views  and  entirely  agrees  with  me 
in  his  treatment  of  the  doctrine  of  rent."  Mangoldt 
in  a  later  publication  *  resented  the  implied  claim  to 
priority  which  Schaffle  here  sets  up.  Mangoldt  first 
refers  to  his  own  earlier  publication  (1855),  which 
Schaffle  had  ignored.  He  then  adds :  "I  repeat 
that  I  only  call  attention  to  this  that  I  may  not  rest 
under  any  false  suspicion.  Not  that  I  may  obtain 
thereby  any  special  merit  or  credit.  I  hold  any  con- 
tention about  the  priority  of  a  thought  which,  so  to 
speak,  is  in  the  air  and  which  is  simply  the  conse- 
quence of  the  already  determined  direction  of  scien- 
tific development,  to  be  very  idle.  I  am  also  not 
disposed  to  maintain  that  the  thought,  either  in  part 
or  whole,  was  not  promulgated  by  some  one  before 
me,  for  who  can  at  this  day  have  a  complete  knowl- 
edge of  the  literature  of  economics  ?"  The  difference 
in  the  spirit  of  the  two  men  is  here  sufficiently  mani- 
fest. I  think  the  judgment  of  any  one  who  will 
compare  their  work  will  be  that  Mangoldt  in  1855 
had  as  clear  a  concept  of  the  general  doctrine  of 
rent  as  any  to  which  Schaffle  ever  attained ;  but  the 

*  "  Yolkswirthschaftslehre,"  p.  485. 


THE  GENERAL  DOCTRINE  OF  RENT.  H7 

latter,  being  the  first  to  treat  the  question  in  a  text- 
book, may  be  said  to  have  incorporated  it  a  little 
more  distinctly  in  the  general  body  of  economic 
theory. 

And  yet,  despite  the  fact  that  this  general  doctrine 
of  rent  was  "  so  much  in  the  air,"  there  were  un- 
doubtedly not  a  few  German  economists  who  failed 
to  lay  firm  hold  upon  it.  So  strongly  had  the  Eng- 
lish classical  school  impressed  itself  upon  all  subse- 
quent economic  literature  that  German  as  well  as 
English  economists  succumbed  to  its  influence,  not  a 
few  of  the  former  failing  to  recognize  the  importance 
of  the  work  done  by  such  men  as  Hufeland  and 
Mangoldt.  Berens  in  his  "  Dogmen  geschichte  der 
Grundrente,"  published  as  late  as  1868,  devotes,  with 
the  exception  of  a  rather  full  notice  of  Liebig,  less 
than  fifty  pages  of  a  four-hundred-paged  book  to  the 
German  literature  of  his  subject.  Hufeland  is  dis- 
missed with  a  meagre  page  and  a  half,  and  this  de- 
spite the  fact  that  Berens  takes  cognizance  of  that 
extension  (Erweitering)  of  the  doctrine  to  the  other 
factors  of  production  in  which  Hufeland  played  so 
conspicious  a  part. 

59.  The  Austrians  on  the  General  Doctrine  of 
Rent. — While  this  doctrine  may  yet  lack  something 
of  complete  acceptance  among  English  and  German 
economists,  the  Austrians  regard  it  as  so  inherent 
a  part  of  economic  thought  as  to  require  no  further 
discussion. 

Wieser  writes  :    "  His   [Bicardo's]  theory  of  land 


VALUE  AND  DISTRIBUTION. 


was  amplified  by  pointing  out  that  the  rent  of  land  is 
influenced  by  situation,  —  i.e.,  by  its  distance  from  the 
market  for  its  produce.  Finally,  it  has  been  shown 
that  the  '  rentability'  of  land  in  towns,  and  also  that 
of  capital  and  labor,  is  graduated  in  the  same  way  as 
that  of  agricultural  land,  and  that  the  opportunity 
of  obtaining  for  the  better  quality  a  greater  rent  —  a 
surplus  return  and  a  surplus  value  —  occurs  as  often 
in  the  one  case  as  in  the  other."  ("  Natural  Value," 
p.  112.) 

In  conclusion,  it  may  be  maintained  that  econo- 
mists are  to-day  fairly  well  agreed  that  rent  is  a  gen- 
eral function,  common  to  all  the  factors  of  produc- 
tion. In  other  words,  that  every  surplus  which  does 
not  enter  into  the  determination  of  price  is  a  rent, 
whether  it  is  secured  by  landlord,  capitalist,  laborer, 
or  entrepreneur. 


BOOK  II.-PROFIT. 


CHAPTER    I. 

PROFIT  A  PRICE-DETERMINING  SURPLUS. 

BJCAKDIAN  economics  divided  the  total  social  sur- 
plus into  rent,  wages,  and  interest.  The  first  two 
being  determined  by  definite  laws,  profit  was  made 
to  include  all  that  was  left  after  rent  and  wages 
were  paid.  In  other  words,  the  term  profit  was  ap- 
plied to  an  undefined  complex  return  in  the  same 
loose  way  in  which  the  pre-Smithian  writers  em- 
ployed the  term  rent.  That  profit,  under  this  use  of 
the  term,  included  interest  was  generally  recognized. 
Eicardo,  indeed,  frequently  employs  interest  and 
profits  as  though  they  were  interchangeable  terms. 
That  this  resulted  in  more  or  less  confusion  of  thought 
need  hardly  be  urged.*  The  first  to  attempt  an  anal- 

*  When  Kicardo  wrote  of  "the  common  rate  of  profit"  *  he 
doubtless  had  in  mind  that  portion  of  the  complex  return 
which  is  usually  designated  as  interest.  So,  too,  when  he 
wrote,  "  Let  us  suppose  that  all  commodities  are  at  their  nat- 
ural price,  and  consequently  that  the  profits  of  capital  in  all 
employments  are  exactly  at  the  same  rate."  f 

Elsewhere  he  writes :  "  A  fall  in  the  general  rate  of  profits 
is  by  no  means  incompatible  with  a  partial  rise  of  profits  in 


*  Bohn  edition,  p.  49.  f  Ibid.,  p.  68. 

119 


120  VALUE  AND  DISTRIBUTION. 

ysis  of  this  complex  return  was  the  late  Francis  A. 
Walker,  who  insisted  that  the  term  profit  should  be 
restricted  to  that  part  of  the  entrepreneur's  return 
which  follows  the  law  of  rent.  In  the  present  chap- 
ter we  will  find  occasion  to  take  exception  to  this  use 
of  the  term,  and  will  suggest  that  it  should  be  re- 
stricted to  those  monopoly  surpluses  that  enter  into 
the  determination  of  price,  while  rent  should  include 
any  and  all  surpluses  that  are  determined  by  price. 
Later  on  we  will  endeavor  to  show  that  interest  is 
distinguished  from  both  rent  and  profit  by  the  fact  that 
it  is  a  normal  surplus.  (See  Sections  113  to  115.) 


particular  employment.  It  is  through  the  inequality  of  profits 
that  capital  is  moved  from  one  employment  to  another."  * 
Here  under  the  name  of  "  general  rate  of  profits"  we  have  the 
phenomena  of  interest,  while  under  profits  in  particular  em- 
ployments we  have  a  recognition  of  that  "  pure  profit"  which 
as  Clark  has  declared,  "exists  under  natural  laws  only  while 
society  is  changing."  Indeed,  this  very  dynamic  quality  is 
clearly  recognized  in  the  last  sentence  of  the  paragraph  just 
quoted. 

Ricardo  was  probably  conscious  of  the  complex  character 
of  the  phenomena  which  he  had  included  under  the  term 
profit.  But  as  he  held  that  scarcity  values  are  the  exception 
rather  than  the  rule,  profit,  as  we  employ  the  term,  would 
naturally  play  an  unimportant  part  in  his  scheme  of  distribu- 
tion, hence  any  further  analysis  of  this  complex  return  seemed 
unnecessary.  But  this,  as  we  have  urged,  is  a  method  of  pro- 
cedure that  is  not  open  to  those  who  believe  that  scarcity 
goods  are  the  rule  rather  than  the  exception. 


*  Bohn  edition,  p.  97. 


PROFIT  A   PRICE-DETERMINING  SURPLUS.  121 

So  long  as  our  reasoning  rests  upon  the  Bicardian 
assumption  of  free  competition  the  necessity  for  this 
economy  in  the  use  of  terms  does  not  appear.  But  the 
moment  we  admit,  with  the  Austrians,  that  scarcity 
goods  are  the  rule  rather  than  the  exception  we  are 
compelled  not  only  to  construct  a  theory  of  value  that 
will  include  such  commodities,  but  are  likewise  con- 
strained to  take  some  cognizance  of  such  scarcity 
goods  in  our  theory  of  distribution.  It  is  no  longer 
open  to  us  to  dismiss  monopoly  surpluses,  or  those 
surpluses  which  enter  into  the  determination  of  price 
as  something  conceivable  rather  than  actually  exist- 
ing. On  the  contrary,  they  must  be  reckoned  with 
and  named  from  the  very  inception  of  any  modern 
treatment  of  the  problem  of  distribution. 

I.    RENT  AND  PROFIT  AND  THEIR  POINTS  OF  DIFFERENCE. 

Let  us  first  take  the  case  of  a  commodity  that  is 
freely  reproducible  or  that  does  not  have  a  scarcity 
value.  In  the  production  of  this  commodity  a 
number  of  entrepreneurs  are  engaged.  As  men 
vary  widely  in  business  skill  and  ability,  some  of 
these  entrepreneurs  will  doubtless  succeed  in  pro- 
ducing the  commodity  at  a  lower  cost  than  others. 
As  it  is  a  freely  reproducible  commodity,  the  least 
skilful  entrepreneur  engaged  in  its  production  will 
secure  only  his  cost.  That  is,  he  will  secure  only 
wages  and  interest  plus  a  normal  wage  for  himself 
as  an  entrepreneur.  Those,  however,  that  are  more 
skilful  will  secure  in  addition  a  surplus  above  their 


122  VALUE  AND  DISTRIBUTION. 

cost.  The  amount  of  this  surplus  will  vary,  of 
course,  with  their  several  degrees  of  skill  and  abil- 
ity. This  is  the  differential  surplus  to  which  Walker 
has  given  the  name  profit,  but  as  it  admittedly  follows 
the  law  of  rent,  it  seems  better  to  follow  the  German 
economists  and  call  it  the  rent  of  the  entrepreneur. 

Let  us,  again,  take  a  case  in  which  the  commodity 
has  a  scarcity  value.  Assume  that  among  the  sev- 
eral entrepreneurs  there  is  the  same  variation  in  skill 
or  ability.  Under  this  last  assumption  all  save  the 
marginal  entrepreneurs  will  receive  a  differential  sur- 
plus or  rent,  whose  amount  is  determined  by  their 
several  degrees  of  skill.  Since,  however,  we  are 
here  dealing  with  a  scarcity  good,  it  follows  that  each 
and  every  entrepreneur  engaged  in  the  production 
of  this  commodity,  the  marginal  man  as  well  as  the 
most  skilful,  will  receive  an  additional  surplus,  to 
which  I  would  restrict  the  term  profit. 

60.  Rent  an  Individual,  Profit  a  Group  Surplus. 
— In  developing  the  points  of    difference  between 
these  two  forms  of  surplus  it  should  first  be  noted 
that  rent  varies  with  the  individual  skill  or  ability 
of  the  entrepreneur.     On  the  other  hand,  profit  is 
secured  in  equal  amounts  by  each  and  every  member 
of  the  group  of  entrepreneurs  engaged  in  the  pro- 
duction of  the  given  commodity.     Hence  one  might 
be  characterized  as  the  individual  and  the  other  as 
the  group  surplus. 

61.  Rent  a  Differential,  Profit  a  Marginal  Sur- 
plus.— The  several  individual  surpluses  may  be  con- 


PROFIT  A  PRICE- DETERMINING  SURPLUS.  123 

ceived  as  arranged  in  a  series,  and  if  this  number 
is  large  enough,  as  in  the  case  of  wheat  land,  their 
variations  might  be  by  differential  increments.  From 
this  stand-point,  therefore,  they  might  be  regarded  as 
differential  surpluses.  The  second  form  of  surplus, 
however,  is  secured  by  the  marginal  producer  in 
common  with  all  others  engaged  in  the  production 
of  the  given  commodity,  hence  it  might  be  called 
the  marginal  surplus. 

62.  Rent  a  Limited  Monopoly,  Profit  a  Monopoly 
Surplus. — Then,  too,  this  group  or  marginal  surplus 
enters  into  the  determination  of  price,  and  is  clearly 
the  result  of  a  monopoly  advantage  in  production, 
and  so  might  fittingly  be  styled  a  Monopoly  Surplus. 
The  individual  or  differential  surplus,  on  the  con- 
trary, is  not  the  result  of  any  such  monopoly  advan- 
tage in  production,  or  at  least  not  to  the  same  degree. 
In  the  case  of  wheat  land,  for  instance,  it  is  not  a 
question  between  good  land  and  no  land  at  all,  but 
between  good  land  and  poorer  land.  And  so  while 
there  is  undoubtedly  a  scarcity  of  the  best  land, 
yet  the  monopoly  in  such  land  is  limited  or  re- 
stricted by  the  existence  of  other  available  though 
poorer  land.  Hence  if  the  first  is  a  monopoly  sur- 
plus, the  second  is  at  most  a  limited  monopoly  surplus. 
This  difference  is  clearly  recognized  by  Malthus,  who 
writes:  "That  there  are  some  circumstances  con- 
nected with  rent  which  have  an  affinity  to  a  natural 
monopoly  will  be  readily  allowed.  The  extent  of  the 
earth  itself  is  limited  and  cannot  be  enlarged  by 


124  VALUE  AND  DISTRIBUTION. 

human  demand.  And  the  inequality  of  soils  occa- 
sions, even  at  an  early  period  of  society,  a  comparative 
scarcity  of  the  best  lands ;  and  so  far  is  undoubtedly 
one  of  the  causes  of  rent  properly  so  called.  On  this 
account,  perhaps,  the  term  partial  monopoly  might 
be  fairly  applicable.  But  the  scarcity  of  land  thus 
implied  is  by  no  means  alone  sufficient  to  produce  the 
effects  observed.  And  a  more  accurate  investigation 
of  the  subject  will  show  us  how  essentially  different 
the  high  price  of  raw  produce  is,  both  in  its  nature 
and  origin  and  the  laws  by  which  it  is  governed, 
from  the  price  of  a  common  monopoly."  ("  An  In- 
quiry into  the  Nature  and  Progress  of  Rent,"  p.  7.) 
63.  Rent  a  Price-Determined,  Profit  a  Price-De- 
termining Surplus. — There  is,  however,  a  still  more 
important  difference  between  these  two  forms  of  sur- 
plus, and  one  that  will  further  justify  the  restricting 
of  the  term  monopoly  to  the  group  or  marginal  sur- 
plus. The  price  of  any  commodity  is  the  amount 
the  consumers  must  pay  under  the  existing  condition 
of  the  supply  of  the  given  commodity.  In  other 
words,  it  is  the  amount  that  must  be  paid  to  the  mar- 
ginal producer  to  induce  him  to  continue  his  efforts 
to  put  this  commodity  on  the  market.  In  the  case 
of  freely  reproducible  goods  this  amount  will  equal 
the  cost  of  this  commodity  to  the  marginal  producer, 
but  where  the  good  has  a  scarcity  price  this  amount 
will  contain  a  surplus  above  the  marginal  producer's 
cost.  It  is  nevertheless  true  that  this  surplus  must 
be  paid  if  the  supply  of  the  commodity  is  to  be 


PROFIT  A  PRICE- DETERMINING  SURPLUS.  125 

maintained.  It  is,  therefore,  the  essential  and  all- 
important  characteristic  of  the  group,  marginal,  or 
monopoly  surplus,  that  it  enters  into  the  determination 
of  price,  while  the  individual,  differential,  or  limited 
monopoly  surplus  does  not  enter  into  the  determination 
of  price.  It  is  true  that  the  latter  is  included  in  the 
price,  but,  as  has  long  been  maintained,  the  causal 
relation  is  from  price  to  rent  and  not  from  rent  to 
price.  Now,  one  of  the  concepts  that  we  have  al- 
ways asssociated  with  monopoly  influences  is  their 
power  to  fix  the  price  which  the  consumer  must  pay. 
If  we  hold  fast  to  this  it  follows  that  the  term  mo- 
nopoly surplus  can  only  include  that  which  we  have 
severally  designated  as  the  group  or  marginal  sur- 
plus. But  far  more  important  than  this  limitation 
of  the  term  monopoly  is  the  distinction  lying  back  of 
it, — namely,  that  one  form  of  surplus  is  price  deter- 
mined and  the  other  price  determining. 

It  seems,  then,  that  our  two  forms  of  surplus  may 
be  variously  characterized  as  follows : 

Rent  might  be  called 

Individual, 


Differential, 
Limited  Monopoly,  or 
Price-determined 
Profit  might  be  called 
Group, 
Marginal, 
Monopoly,  or 
Price-determining 


Surplus. 


Surplus. 


126  VALUE  AND  DISTRIBUTION. 

64.  Competing  Differential  Concepts. — It  might 
be  urged  as  against  the  above  contention  that  since 
scarcity  prices  are  of  such  frequent  occurrence,  the 
various  industries  could  be  arranged  according  to 
the  amount  of  their  marginal  surplus,  and  that  this 
would  give  us  a  series  that  might  be  even  more  truly 
differential  than  that  to  which  we  have  applied  this 
term.  But,  after  all,  what  economists  wish  to  know 
is,  how  the  total  surplus  contained  in  the  price  of 
any  given  commodity  is  distributed  among  those 
who  are  parties  to  the  production  of  that  commodity. 
In  other  words,  the  ultimate  objective  phenomena 
with  which  we  have  to  deal  are  the  prices  of  com- 
modities. Hence  we  would  insist  that  the  differential 
surplus,  which  has  primary  importance  for  us  as 
students  of  distribution,  is  that  which  arises  in  con- 
nection with  the  production  of  a  given  commodity. 
This  is  the  differential  surplus  that  is  determined  by 
price,  and  hence  in  all  studies  of  distribution  must 
be  sharply  distinguished  from  that  marginal  surplus 
which  enters  into  the  determination  of  price. 

II.  INTEREST  AND  PROFIT  AND  THEIR  POINTS  OF  DIFFERENCE. 

Having  clearly  distinguished  profit  from  rent,  it 
will  now  be  necessary  to  distinguish  profit  from  the 
other  form  of  surplus  (interest)  so  often  confounded 
with  it.  In  doing  so  I  shall  be  compelled  to  antici- 
pate a  portion  of  the  argument  of  a  much  later 
chapter.  We  have  just  seen  that  the  differential 
series  which  is  developed  in  the  production  of  a 


PROFIT  A  PRICE-DETERMINING  SURPLUS.  127 

given  commodity  is  not  the  only  series  of  this  kind 
that  might  arise.  In  other  words,  we  may  conceive 
of  the  various  industrial  activities  as  arranged  in 
a  series  according  to  their  relative  productivity  or 
profitableness.  From  this  it  follows  that  there  are 
two  conceivable  margins  of  production, — the  margin 
in  the  production  of  a  given  commodity  and  the 
margin  of  the  entire  field  of  industry.  Since  the 
supply  of  capital  is  limited  while  the  opportunities 
for  its  profitable  employment  are  practically  un- 
limited, it  follows  that  all  capital  which  is  free  to 
move  can  find  profitable  employment ;  but  here  as 
elsewhere  the  return  secured  by  the  capitalist  as  such 
is  determined  by  the  marginal  utility  of  capital  or 
by  its  productivity  in  the  marginal  or  least  produc- 
tive industry. 

65.  Interest  a  Normal,  Profit  a  Monopoly  Sur- 
plus.— It  is  to  this  marginal  surplus,  or  the  earnings 
of  capital  in  the  marginal  or  least  productive  in- 
dustry, that  the  term  interest  must  be  restricted. 
Profit,  on  the  other  hand,  is  the  marginal  surplus 
that  arises  in  connection  with  the  production  of  a 
single  commodity.  Again,  profit  only  arises  where 
free  competition  fails,  and  so  is  a  monopoly  surplus. 
Interest,  as  we  shall  take  occasion  to  show  later  on 
(Sections  113  to  115),  only  arises  under  conditions  of 
free  competition,  and  so,  in  contradistinction  to  the 
other  two  forms  of  surplus,  may  be  called  a  normal  sur- 
plus. This  gives  us  the  three  forms  of  surplus, — Kent 
or  limited  monopoly  surplus,  Profit  or  the  strictly  mo- 


128  VALUE  AND  DISTRIBUTION. 

nopoly  surplus,  and  Interest  or  the  normal  surplus. 
The  first  two  are  developed  in  connection  with  the 
production  of  any  given  commodity,  the  third  is  de- 
termined in  the  entire  field  of  production.  It  should 
also  be  borne  in  mind  that  while  rent  is  price  deter- 
mined, both  profit  and  interest  enter  into  the  deter- 
mination of  the  price  of  commodities. 


CHAPTER    II. 

PROFITS  AND  THE  CONCEPT  OF  A  NO-BENT  LAND. 

IT  lias  been  shown  that  in  the  production  of  any 
given  commodity  all  payments  at  the  margin  enter 
into  the  determination  of  price.  Again,  it  was  main- 
tained that  the  original  and  fundamental  contention 
of  the  doctrine  of  rent  was  that  rent  is  a  surplus 
that  does  not  enter  into  the  determination  of  price. 
This  compels  the  further  conclusion  that  the  marginal 
land  does  not  pay  a  rent,  or  that  there  is  a  no-rent 
land.  This  corollary  of  the  doctrine  has  been  sub- 
jected to  so  much  criticism  as  to  compel  its  abandon- 
ment by  some  of  the  most  strenuous  advocates  of  the 
doctrine  of  rent.  It  is  the  purpose  of  the  present 
chapter  to  show  that  this  abandonment  of  the  concept 
of  a  no-rent  land  is  unnecessary,  and  that  the  argu- 
ments against  this  corollary  get  their  seeming  force 
by  confounding  the  differential  surplus  or  rent  with 
a  marginal  surplus  or  profit. 

66.  Mill's  Admissions  and  their  Logical  Result. — 
"  Rent/'  writes  Mill,  "  is  not  an  element  in  the  cost 
of  production  of  the  commodity  that  yields  it,  except 
in  the  case  (rather  conceivable  than  actually  existing) 
in  which  it  results  from  and  represents  a  scarcity 
value.  But  when  land  capable  of  yielding  rent  in 

9  129 


130  VALUE  AND  DISTRIBUTION. 

agriculture  is  applied  to  some  other  purpose  the  rent 
which  it  would  have  yielded  is  an  element  in  the  cost 
of  production  of  the  commodity." 

Whether  Mill  so  intended  it  or  not,  we  here  have 
a  complete  abandonment  of  the  doctrine  of  rent,  and 
this  whether  we  confine  ourselves  to  the  first  or  sec- 
ond of  his  contentions.  It  has  elsewhere  been  shown 
that  Mill's  contention  in  regard  to  scarcity  goods 
being  exceptional  is  without  warrant  in  experience. 
As  a  matter  of  fact,  such  goods  are  the  rule  rather 
than  the  exception.  What,  then,  becomes  of  the  doc- 
trine of  rent  under  Mill's  first  contention  ?  Nor  is 
the  outlook  any  more  hopeful  under  his  second  con- 
tention. Let  us  assume  that  a  rise  in  the  price  of 
wheat  makes  it  profitable  to  extend  wheat  cultiva- 
tion to  land  that  has  heretofore  been  employed  for 
grazing.  Then,  if  I  understand  Mill's  second  con- 
tention, he  holds  that  the  amount  paid  for  the  use  of 
this  land  for  the  growing  of  wheat  must  include  the 
amount  paid  for  grazing  purposes,  and  will  therefore 
enter  into  the  determination  of  the  price  of  wheat. 

That  the  farmer  of  the  marginal  wheat  land  (for- 
merly grazing  land)  must  pay  the  owner  of  this  land 
an  amount  that  is  equal  to  its  rent  as  grazing  land 
must  be  admitted.  It  must  also  be  admitted  that  as 
this  is  a  payment  at  the  margin  of  wheat  production 
it  will  enter  into  the  determination  of  the  price  of 
wheat.  From  this  Mill  concludes  that  in  all  such 
instances  rent  enters  into  the  determination  of  price. 
Now,  when  it  is  remembered  that  under  this  conten- 


PROFITS   AND  THE   CONCEPT   OF   A   NO -RENT   LAND. 

tion  rent  enters  into  the  determination  of  the  price 
of  all  the  products  of  land  save  those  that  are  pro- 
duced in  the  least  profitable  branch  of  land  employ- 
ments, it  is  clear  that  Mill's  second  contention  is 
well-nigh  as  fatal  as  the  first  to  the  doctrine  of  rent. 
67.  Mill  inadvertently  includes  a  Marginal  Sur- 
plus or  Profit  under  Rent. — Mill,  of  course,  did  not 
see  that  his  contentions  led  to  this  result,  and  so  con- 
tinued to  hold  the  doctrine  of  rent  as  an  essential 
part  of  the  orthodox  scheme  of  distribution.  The 
reason  for  this  failure  to  realize  the  serious  nature  of 
his  admissions  is  to  be  found  in  the  facts,  first,  that 
he  believed  scarcity  goods  to  be  "  rather  conceivable 
than  actually  existing,"  and,  second,  that  he  failed 
to  recognize  that  under  his  second  contention  he 
was  dealing  with  that  very  scarcity  value  which  he 
believed  might  safely  be  ignored.  As  Clark  has 
written,  "  For  exact  results  each  distinct  kind  of 
agriculture  needs  to  be  treated  as  a  separate  industry. 
The  principle  of  non-competing  groups  has  as  clear 
an  application  here  as  in  other  departments  of  econ- 
omy. Wheat  farming  can  scarcely  be  said  to  come 
into  competition  with  sheep  raising,  nor  can  market 
gardening  with  dairy  farming,  wool  growing,  or  cat- 
tle raising.  .  .  .  Each  of  these  industries  has  its  own 
margin  of  cultivation."  In  other  words,  when  Mill 
included  the  rent  paid  for  one  use  of  land  as  part 
of  its  rent  in  another  employment  he  included  a 
scarcity,  marginal,  or  monopoly  surplus  under  the 
caption  of  rent.  This  may  be  shown  a  priori  and 


132  VALUE   AND  DISTRIBUTION. 

in  a  brief  way.  In  the  preceding  chapter  we  saw 
that  the  monopoly  surplus  contained  in  the  price  of 
scarcity  goods  was  secured  by  the  marginal  man  in 
common  with  all  those  that  produce  under  more  fa- 
vorable circumstances.  In  other  words,  the  scarcity 
of  any  good  is  reflected  in  the  fact  that  it  yields  a 
monopoly,  or  marginal  surplus,  or  a  surplus  that 
enters  into  the  determination  of  price.  A  moment's 
consideration  will  show  that  the  amount  which  would 
have  been  paid  for  the  land  for  grazing  purposes  is  a 
surplus  of  this  kind.  For  it  is  secured  by  the  owners 
of  the  marginal  land  in  wheat  production  in  com- 
mon with  the  owners  of  the  better  land  employed  in 
the  producing  of  wheat,  and  thus  as  a  group,  mo- 
nopoly, or  marginal  surplus  it  certainly  enters  into 
the  determination  of  the  price  of  wheat.  In  other 
words,  we  here  have  that  marginal  surplus  to  which 
the  name  profit  has  been  applied.  I  would  urge, 
therefore,  that  the  including  of  this  form  of  surplus 
under  the  term  rent  can  only  result  in  confusion. 

68.  Rent  the  Differential  Surplus  in  a  Single  In- 
dustry.— The  question  now  arises,  Is  there  any  part 
of  the  total  payment  made  to  the  owners  of  wheat 
land  that  is  a  differential  surplus,  or  that  does  not 
enter  into  the  determination  of  price,  and  so  satisfies 
the  fundamental  condition  of  the  doctrine  of  rent? 
Tie  answer  is  yes.  If  we  confine  ourselves  to  the 
variations  in  the  productivity  of  land  employed  for 
the  growing  of  some  one  commodity,  say  wheat,  we 
find  a  surplus  that  is  a  true  differential  and  which 


PROFITS  AND  THE  CONCEPT  OF  A  NO-RENT  LAND.   133 

does  not  enter  into  the  determination  of  the  price  of 
the  given  commodity.  Any  payments  beyond  this  are 
included  either  under  interest  or  profit,  and  though 
these  latter  surpluses  are  both  included  in  the  gross 
amount  paid  to  the  landlord,  there  is  no  more  reason 
for  including  one  than  for  including  the  other  under 
the  term  rent.  In  either  case  you  invalidate  the 
whole  doctrine  of  rent.  In  brief,  then,  the  rent  of 
wheat  land  is  not  the  difference  in  productivity  be- 
tween the  best  wheat  land  and  the  poorest  land  in 
any  employment,  but  the  difference  between  the  best 
and  poorest  wheat  land. 

69.  Hobson's  Objections  to  this  Use  of  the  Term 
Rent. — The  earlier  discussion  of  this  question  was 
largely  confined  to  the  problem  of  land  rents.  But 
with  the  recognition  of  the  fact  that  rent  is  a  gen- 
eral function  common  to  all  factors  of  production,  a 
more  extended  use  of  the  term  rent  has  been  made 
to  include  not  only  the  earnings  of  land  but  as  well 
the  whole  range  of  industry.  A  recent  writer  *  has 
declared,  "  It  will  be  open  to  us  if  we  prefer  it,  for  it 
is  entirely  a  question  of  convenience  in  the  use  of 
the  terms,  to  say  that  land  ...  at  the  margin  of 
employment  pays  no  rent ;  that  is,  we  may  take  the 
lowest  return  for  the  use  of  land  and  call  it  by  some 
other  name  than  rent.  We  would  thus  be  able  to 
maintain,  as  a  general  proposition,  that  rent  forms 
no  element  of  price.  But  to  do  this  we  would  be 

*  J.  H.  Hobson,  Quarterly  Journal  of  Economics,  1891. 


134  VALUE   AND  DISTRIBUTION. 

compelled  to  an  elaborate  grading  of  industries,  ac- 
cording to  the  prices  paid  for  land,  labor,  and  capi- 
tal, at  the  margin  of  employment  in  each  respective 
industry. 

"  If,  on  the  other  hand,  as  seems  more  reasonable, 
we  should  prefer  to  measure  by  a  single  line  of  fixed 
money  value  applied  through  the  whole  of  industry, 
we  must  call  by  the  name  rent  all  payments  for  the 
use  of  land,  and  all  payments  beyond  three  per  cent., 
and  five  shillings  for  the  use  of  capital  and  labor. 
But  whichever  mode  of  reckoning  we  prefer,  it  will 
be  equally  applicable  to  all  three  requisites  of  pro- 
duction." 

Now,  it  may  be  true  that  "  it  is  entirely  a  question 
of  convenience  in  the  use  of  terms"  whether  we  em- 
ploy separate  and  distinct  terms  for  these  two  forms 
of  surplus  or  take  rent  as  a  generic  term  applicable 
to  both,  and  then  distinguish  between  them  by  em- 
ploying additional  qualifying  terms,  as  price-deter- 
mining or  price-determined  rent.  But  it  is  hardly  a 
question  of  mere  convenience  whether  or  not  one  of 
the  fundamental  cleavage  planes  in  all  questions  of 
distribution  shall  be  recognized  in  our  terminology. 
In  other  words,  we  can  only  confound  confusion  by 
including  both  these  forms  of  surplus  without  any 
discrimination  under  a  common  name.  It  is  true 
that  both  forms  enter  into  the  amount  paid  to  the 
landlord,  yet  by  what  compulsion  must  both  of  them 
be  included  under  the  term  rent?  This  term  has 
already  been  appropriated  and  long  defined  as  a  sur- 


PROFITS  AND  THE  CONCEPT  OF  A  NO-BENT  LAND.      135 

plus  that  is  determined  by  price.    Why,  then,  so  long 

as  we  have  a  share  in  distribution  of  which  this  is 

true,  should  we  surrender  this  use  of  the  term  that  it 

may  be  reappropriated  and  redefined  ?    It  is  true  that 

Eicardo,  having  in  mind  an  ideal  condition  of  free 

competition,  held  that  price  was  made  up  of  rent  and 

costs.    At  present,  however,  we  recognize  the  general 

prevalence  of  scarcity  goods,  and  have  reconstructed 

our  theories  of  value  and  price  to  the  end  that  they 

shall  include  such  goods.    Why,  then,  should  we  con- 

Afound  the  discussion  of  distribution  by  including  the 

S  special  and  peculiar  surplus  that  results  from  scarcity 

\  values,  and  so  enters  into  the  determination  of  price 

(  under  the  term  rent  ? 

We  have  already  maintained  that  there  are  three 
essentially  different  forms  of  surplus, — the  differen- 
tial, the  marginal,  and  the  normal ;  the  last  typified 
in  interest.  Our  objection  to  Hobson's  contention  is, 
in  brief,  that  in  his  anxiety  clearly  to  distinguish 
this  third  form  from  the  other  two  he  is  led  to  ignore 
the  difference  between  the  differential  and  marginal 
surpluses,  a  difference  which  I  believe  to  be  of  fun- 
damental importance  in  any  discussion  of  the  prob- 
lem of  distribution. 

70.  Objections  to  Walker's  Use  of  the  Term  Profit. 
— We  have  seen  that  Walker  applied  the  term  profit 
to  that  portion  of  the  entrepreneur's  return  which  fol- 
lows the  law  of  rent.  Not  the  least  of  the  objections 
to  this  use  of  the  term  profit  is  the  fact  that  it  breaks 
in  the  most  violent  way  with  all  the  traditions  of  the 


136  VALUE  AND  DISTRIBUTION. 

science.  For  no  matter  how  confused  economists 
may  have  been  in  their  use  of  the  term  profit,  no 
matter  how  they  may  have  confounded  it  with  inter- 
est, they  seldom  failed  to  maintain  that  it  enters  into 
the  determination  of  price,  and  hence  that  it  is  in 
direct  antithesis  to  rent  or  to  that  which  is  deter- 
mined by  price. 

Adam  Smith  writes :  "  Rent,  it  is  to  be  observed, 
therefore,  enters  into  the  composition  of  the  price  of 
commodities  in  a  different  way  from  wages  and  profit. 
High  or  low  wages  and  profit  are  the  causes  of  high 
or  low  price ;  high  or  low  rent  is  the  effect  of  it." 

Malthus  writes  :  "  Profits  are  in  reality  a  surplus,  as 
they  are  in  no  respect  proportioned  (as  intimated  by 
the  economists)  to  the  wants  and  necessities  of  the 
owners  of  capital,  but  they  take  a  different  course  in 
the  progress  of  society  from  rents,  and  it  is  necessary, 
in  general,  to  keep  them  quite  separate."  * 

Ricardo  writes :  "  Mr.  Malthus  appears  to  think 
that  it  is  a  part  of  my  doctrine  that  the  cost  and  the 
value  of  a  thing  should  be  the  same ;  it  is,  if  he  means 
by  cost,  '  cost  of  production'  including  profits."  f 
Again,  on  page  345,  he  writes :  "  The  laws  which 
regulate  the  progress  of  rent  are  widely  different  from 
those  which  regulate  the  progress  of  profits,  and  sel- 
dom operate  in  the  same  direction." 

J.  S.  Mill  writes :  "  Profits,  therefore,  as  well  as 


.*  Inquiry  into  the  Nature  and  Progress  of  Rent,  p.  16. 
f  Bohn  edition,  p.  39. 


PROFITS  AND  THE  CONCEPT  OF  A  NO-RENT  LAND.      137 

wages,  enter  into  the  cost  of  production,  which  de- 
termines the  value  of  produce. "  While  Walker  him- 
self never  fails  to  insist  that  the  essential  fact  in 
regard  to  rent  is,  that  it  does  not  enter  into  the  cost 
of  production. 

This  being  the  final  test  in  regard  to  "  rent/'  why 
should  we  not  call  that  part  of  the  entrepreneur's  re- 
turn that  satisfies  this  condition  the  rent  of  the  entre- 
preneur, so  allowing  us  to  employ  the  term  "  profit" 
to  designate  that  form  of  surplus  which  enters  into 
the  determination  of  price  ?  This,  as  I  have  en- 
deavored to  show,  would  agree  better  with  the  tra- 
ditional use  of  the  term  profit. 

71.  The  Suggested  Use  of  the  Terms  Rent  and 
Profit. — It  is  not  given  to  any  one  person  to  say  what 
terms  shall  be  adopted ;  this  can  only  result  from  the 
establishing  of  some  consensus  in  the  matter  among 
economists  generally ;  a  single  writer  may  show,  as 
I  have  endeavored  to  do,  that  a  new  concept  has 
arisen,  and  that  a  failure  to  reach  any  agreement  as 
to  the  terms  employed  has  resulted  in  increasing  con- 
fusion ;  he  may  then  suggest  such  terms  or  use  of 
terms  as  seems  to  him  to  eliminate  this  source  of  con- 
fusion. To  that  end  I  would  suggest  that  the  term 
rent  be  strictly  confined  to  the  price-determined  sur- 
plus that  arises  in  connection  with  the  production  of 
a  given  commodity,  and  that  the  term  profit  be  con- 
fined to  the  monopoly  or  price-determining  surplus 
that  arises  in  connection  with  the  production  of  a 
given  commodity. 


138  VALUE  AND  DISTRIBUTION. 

But  too  much  must  not  be  expected  from  these  or 
any  other  equally  short  terms.  If,  consciously  or 
unconsciously,  we  think  of  these  as  meaning  indi- 
vidual and  group,  differential  and  marginal,  or  any- 
thing but  price- determined  and  price-determining 
surpluses,  we  are  likely  sooner  or  later  to  end  in  con- 
fusion. When  we  write  rent,  we  should  think  price- 
determined  surplus.  When,  on  the  other  hand,  we 
write  profit,  it  is  price-determining  surplus  that  should 
be  called  up  in  our  mind.  It  is  far  less  important 
what  terms  are  employed  than  that  we  should  not 
lose  sight  of  this  fundamental  distinction. 


BOOK  III.-INTEREST. 


CHAPTER    I. 

EARLIER  IDEAS  IN  REGARD   TO  INTEREST. 

I.    USURY  IN  LESS  DEVELOPED  SOCIETIES;  INTEREST  IN 
HIGHLY  DEVELOPED  SOCIETIES. 

IN  earlier  times  a  large  portion  of  all  loans  was 
made  for  purposes  of  consumption,  and  frequently  to 
people  in  great  need  of  money.  Such  loans,  indeed, 
still  predominate  in  communities  where  capitalistic 
methods  of  production  have  not  attained  any  great 
development.  Under  such  circumstances  the  in- 
terest* paid  is  usually  quite  high;  the  capitalist  (or 
seller)  has  the  monopoly  advantage,  and  is  disposed 
to  force  the  price  of  his  commodity  to  the  extreme 
limit  set  by  its  marginal  utility  to  the  borrower  (or 
buyer) . 

72.  Aristotle. — It  is  not  at  all  surprising,  there- 
fore, that  under  these  circumstances  the  taking  of  in- 
terest has  been  vehemently  denounced  by  both  philos- 

*  The  term  interest  is  here  employed  as  in  common  usage, 
and  so  includes  a  monopoly  surplus.  Later  on  it  will  be 
limited  to  the  rate  fixed  by  the  marginal  productivity  of 
capital  or  to  the  normal  return  for  the  use  of  capital. 

139 


140  VALUE  AND  DISTRIBUTION. 

opher  and  priest.  Aristotle  writes  :  "  The  most  hated 
sort  [of  money-making],  and  with  the  greatest  rea- 
son, is  usury,  which  makes  a  gain  of  money  itself, 
and  not  from  the  natural  use  of  it.  For  money  was 
intended  to  be  used  in  exchange,  but  not  to  increase 
at  interest.  And  this  term  usury,  which  means  the 
birth  of  money  from  money,  is  applied  to  the  breed- 
ing of  money  because  the  offspring  resembles  the 
parent.  Wherefore  of  all  modes  of  making  money 
this  is  the  most  unnatural/'* 

In  ancient  times  this  attitude  towards  the  problem 
of  interest  found  repeated  expression  in  the  civil  law. 
This  was  especially  true  wherever  the  agrarian  ele- 
ment exercised  the  legislative  function,  but  as  com- 
merce expanded,  such  laws,  though  still  retained  on 
the  statute  books,  became,  to  a  large  extent,  dead 
letters.  After  the  collapse  of  the  Roman  Empire 
and  the  return  of  society  to  more  primitive  con- 
ditions the  opposition  to  interest  was  again  renewed. 
But  with  the  rise  of  modern  trade  and  industry, 
which  preceded  the  Reformation,  the  attitude  towards 
this  question  again  suffered  a  change,  the  canon 
laws  and  the  denunciations  of  the  Church  being 
alike  ignored  in  more  progressive  countries  like  the 
Netherlands. 

73.  Calvin. — In  keeping  with  this  tendency  we  find 
that  the  champion  of  Protestantism  not  only  repudi- 
ates the  canon  laws,  but  actually  defends  the  taking 

*  Jowett's  translation,  p.  19. 


EARLIER  IDEAS  IN  REGARD  TO  INTEREST.  141 

of  interest  where  it  is  "  equitable  and  fair."  It  is 
interesting  to  notice  that  his  defence  rests  entirely 
upon  the  change  that  had  taken  place  in  industrial 
conditions,  a  change  that  resulted  in  a  condition  of 
affairs  in  which  most  loans  were  made  for  purposes 
of  production.  And  so  we  find  that  Calvin  recog- 
nizes that  the  rate  of  interest  may  be  fair  and  equita- 
ble when  the  borrower  can  so  employ  the  sum  bor- 
rowed as  to  secure  a  return  for  himself  in  excess  of 
the  interest  paid  to  the  lender. 

74.  Locke. — This  phase  of  the   question   is   still 
further  accented  by  Locke ;  *  he,  however,  like  Cal- 
vin, still  has  in  mind  only  that  interest  which  is  a 
return  for  the  use  of  money, 

II.    INTEREST  A  RETURN  FOR  THE  USE  OF  WEALTH  AND 
,      NOT  FOR  THE  USE  OF  MONEY. 

75.  Hume,  however,  saw  quite  clearly  that  interest 
is  a  return  for   the  use  of  wealth   in   general  and 
not  for  the  use  of  a  particular  form  of  wealth, — 
money.     This  comes  out  in  his  demonstration  of  the 
fact  that  the  rate  of  interest  in  a  country  does  not 
depend  on  the  amount  of  gold  and  silver  that  the 
country  possesses,  "  but  on  the  amount  of  its  riches 
or  stock."  f 

The  importance  of  this  proposition  in  its  bearing 
upon   the  theory  of  interest  is  even  yet  not  fully 


*  Some  Considerations  of  the  Consequences  of  Lowering 
the  Eate  of  Interest  and  Raising  the  Yalue  of  Money,  1691. 
f  Of  Interest,  Essay  XXYI. 


142  VALUE  AND  DISTRIBUTION. 

realized,  many  well-meaning  though  not  well-in- 
formed advocates  of  reform  still  contending  that  the 
rate  of  interest  may  be  decreased  by  increasing  the 
supply  of  money.  Anything  like  a  complete  solu- 
tion of  this  problem  must  be  deferred  to  a  later  chap- 
ter, but  it  may  be  well  to  note  that  while  the  total 
payment  to  a  landlord  includes  several  elements,  yet 
economists  have  restricted  the  term  rent  to  a  par- 
ticular portion  of  this  total  payment ;  so,  too,  the 
total  payment  for  the  use  of  capital  may  include 
several  elements,  but  for  the  sake  of  clear  thinking 
economists  must  restrict  the  term  interest  to  a  par- 
ticular portion  of  this  total  payment.  The  owner  of 
a  scarce  machine  or  plant  secures  a  certain  net  re- 
turn. Out  of  this  he  pays  a  certain  minimum  rate 
to  the  capitalist  for  the  sums  borrowed.  It  is  to 
this  minimum  rate  that  economists  would  restrict 
the  term  interest.  Any  surplus  above  this  is  clearly 
due  to  the  scarcity  of  the  particular  machine  or 
plant ;  for  as  these  are  multiplied  such  extra  gain 
tends  to  disappear.  The  application  of  this  to  the 
ease  of  money  is  obvious.  An  increase  in  the  supply 
of  the  money  commodities  would  unquestionably 
tend  to  decrease  the  extra  gain  that  arises  from  the 
scarcity  of  these  particular  forms  of  wealth,  but  it 
would  not  seriously  or  directly  affect  the  normal 
surplus  or  interest  per  se* 

*  Prior  to  Hume's  time  it  was  held  that  a  nation  should  so 
regulate  its  commerce  as  to  attract  to  itself  large  supplies  of 


EARLIER  IDEAS  IN  REGARD  TO  INTEREST.  143 

76.  Adam  Smith. — While  this  writer  did  not  suc- 
ceed in  working  out  any  coherent  theory  of  interest, 
yet  his  "Wealth  of  Nations"  *  contains  the  suggestion 
of  at  least  four  theories  that  have  found  favor  in 
more  recent  literature.  These  are  known  as  The 
Exploitation  Theory,  The  Use  Theory,  The  Produc- 
tivity Theory,  and  the  Abstinence  Theory.  In  the 
chapters  immediately  following  we  will  review  these 
theories  in  the  above-mentioned  order. 


the  money  commodities, — gold  and  silver.  In  other  words,  it 
was  held  that  a  country  was  wealthy  if  it  held  large  stocks  of 
these  commodities.  Hume  protested  against  this,  declaring 
that  the  wealth  of  a  community  did  not  lie  in  its  supply  of  the 
money  commodities,  but  in  its  supply  of  general  commodities, 
the  things  that  men  eat,  wear,  etc.  The  reaction  of  thought 
that  set  in  with  Hume's  statement  of  the  case  has  possibly 
gone  too  far.  It  is  true  that  the  normal  surplus  or  interest 
per  se  depends  in  last  resort  upon  the  marginal  productivity 
of  general  capital,  and  so  is  largely  independent  of  the  sup- 
ply of  money  or  money  commodities.  It  is,  however,  also 
true  that  a  limited  supply  of  money  may  give  to  the  owner 
of  these  money  commodities  a  monopoly  advantage;  hence 
variations  in  the  supply  of  money  may  seriously  affect  the 
distribution  and  so  the  production  of  general  wealth.  It  re- 
mains true,  however,  and  this  is  the  fact  that  interests  us 
most  at  this  point,  that  interest  per  se  is  a  normal  surplus,  and 
depends  not  upon  the  amount  of  the  money  commodities  in  a 
country,  but  upon  the  supply  of  general  capital  or  productive 
goods. 

*  Book  I.  Chap.  VI.,  and  Book  II.  Chap.  I. 


CHAPTER    II. 

THE  EXPLOITATION  THEORY  OF  INTEREST. 

THIS  theory  may  be  fairly  stated  in  the  following 
propositions : 

1.  The  value  of   any  good  is  measured  by  the 
quantity  of  labor  required  to  produce  it. 

2.  Capital  is  not  an  original  and  independent  fac- 
tor of  production,  but  may  be  resolved  into  the  labor 
that  produced  it. 

3.  The  whole  product   belongs  in  equity  to  the 
laborer.     The  capitalist,  however,  takes  advantage  of 
the  laborer's  necessities  and  compels  him  to  make 
a  wages  contract  that  despoils  the  wage-earner  of  a 
large  part  of  the  product  of  his  labor ;  this  is  done, 
of  course,  under  the  sanction  of  law  and  custom.* 

*  These  propositions  will  all  be  found  in  the  following  pas- 
sages from  Rodbertus.  He  writes:  "As  there  can  be  no  in- 
come unless  it  is  produced  by  labor,  rent  rests  on  two  indis- 
pensable conditions.  First,  there  can  be  no  rent  if  labor  does 
not  produce  more  than  the  amount  which  is  just  necessary 
to  the  laborers  to  secure  the  continuance  of  their  labor,  for  it 
is  impossible  that  without  such  a  surplus  any  one,  without 
himself  laboring,  can  regularly  receive  an  income.  Secondly, 
there  could  be  no  rent  if  arrangements  did  not  exist  which 
deprive  the  laborers  of  this  surplus,  either  wholly  or  in  part, 
and  give  it  to  others  who  do  not  themselves  labor,  for  in  the 
nature  of  things  the  laborers  themselves  are  always  the  first 
to  come  into  possession  of  their  product.  That  labor  yields 
144 


THE  EXPLOITATION  THEORY  OF  INTEREST.  145 

77.  The  Contention  that  the  Value  of  all  Goods 
is  measured  by  Quantity  of  Labor. — It  should  be 
noted  that  the  socialist  writers  believed  that  in  this 
contention  they  simply  followed  the  teachings  of  the 

such  a  surplus  rests  on  the  economic  grounds  that  increases 
the  productivity  of  labor.  That  this  surplus  is  entirely,  or  in 
part,  withdrawn  from  the  laborers  and  given  to  others  rests 
on  grounds  of  positive  law ;  and  as  law  has  always  united 
itself  with  force,  it  only  effects  this  withdrawal  by  continual 
compulsion."  Eodbertus  defines  rent  as  "  all  income  secured 
without  personal  exertion  solely  in  virtue  of  possession."  The 
term  rent,  as  here  employed,  evidently  includes  any  and  all 
parts  of  the  social  product  that  are  not  secured  by  the  laborer, 
whether  they  take  the  form  of  rent,  profit,  or  interest. 

"  The  form  which  thia  compulsion  originally  took  was  slavery, 
the  origin  of  which  is  contemporaneous  with  that  of  agricul- 
ture and  landed  property.  The  laborers  who  produced  such  a 
surplus  in  their  labor-product  were  slaves,  and  the  master  to 
whom  the  laborers  belonged,  and  to  whom  consequently  the 
product  itself  also  belonged,  gave  the  slaves  only  so  much  as 
was  necessary  for  the  continuance  of  their  labor,  and  kept 
the  remainder  or  surplus  to  himself.  If  all  the  land,  and  at 
the  same  time  all  the  capital  of  a  country,  has  passed  into 
private  property,  then  landed  property  and  property  in  capi- 
tal exert  a  similar  compulsion  even  over  freed  or  free  laborers. 
For,  first,  the  result  will  be  the  same  as  in  slavery,  that  the 
product  will  not  belong  to  the  laborers,  but  to  the  masters  of 
land  and  capital;  and,  secondly,  the  laborers  who  possess 
nothing,  in  the  face  of  the  masters  possessing  land  and  capi- 
tal, will  be  glad  to  receive  a  part  only  of  the  product  of  their 
own  labor  with  which  to  support  themselves  in  life ;  that  is  to 
say,  again,  to  enable  them  to  continue  their  labor.  Thus,  al- 
though the  contract  of  laborer  and  employer  has  taken  the 
place  of  slavery,  the  contract  is  only  formally  and  not  actu- 

10 


146  VALUE  AND  DISTRIBUTION. 

orthodox  economists  to  their  legitimate  conclusions, 
— a  belief  for  which  they  certainly  found  consider- 
able warrant  in  the  writings  of  the  earlier  English 
economists. 

(a)  RlCARDO   AND   THE   CASE  OF   SCARCITY  GOODS. 

— Ricardo  writes  :  "  There  are  some  commodities  the 
value  of  which  is  determined  by  their  scarcity  alone. 
No  labor  can  increase  the  quantity  of  such  goods, 
and  therefore  their  value  cannot  be  lowered  by  an 
increased  supply.  Some  rare  statues  and  pictures, 
scarce  books  and  coins,  wines  of  a  peculiar  quality, 
which  can  be  made  only  from  grapes  grown  on  a 
particular  soil  of  which  there  is  a  very  limited  quan- 
tity, are  all  of  this  description.  Their  value  is  wholly 
independent  of  the  quantity  of  labor  originally  neces- 
sary to  produce  them,  and  varies  with  the  varying 
wealth  and  inclinations  of  those  who  are  desirous 
to  possess  them."  He,  however,  adds,  "  These  com- 
modities, however,  form  a  very  small  part  of  the 
mass  of  commodities  daily  exchanged  in  the  market. 
By  far  the  greatest  part  of  those  goods,  which  are 
the  object  of  desire,  are  procured  by  labor ;  and  they 
may  be  multiplied,  not  in  one  country  alone,  but  in 
many,  almost  without  an  assignable  limit,  if  we  are 
disposed  to  bestow  the  labor  necessary  to  obtain 
them."  ("  Principles  of  Economics,"  Chap.  I.  Sect.  I.) 

ally  free,  and  hunger  makes  a  good  substitute  for  the  whip. 
What  was  formally  called  food  is  now  called  wage."  ("  Soziale 
Frage,"  p.  33.)  We  have  here  availed  ourselves  of  the  transla- 
tion in  Bohm-Bawerk's  "  Capital  and  Interest." 


THE  EXPLOITATION  THEORY  OF  INTEREST.  147 

While  we  have  here  a  clear  recognition  of  the  fact 
that  value  may  be  determined  either  by  labor  or  by 
scarcity,  yet  the  cases  in  which  scarcity  is  the  deter- 
mining factor  are  dismissed  from  further  considera- 
tion as  being  of  exceptional  occurrence  in  the  world's 
exchanges.  Clearly,  then,  the  argument  by  which 
the  orthodox  economists  would  demonstrate  that  value 
depends  entirely  upon  labor  stands  or  falls  with  the 
truth  of  this  last  assumption, — that  scarcity  goods 
are  exceptional.  It  is  in  this  connection  that  Bohm- 
Bawerk  introduces  his  formidable  list  of  exceptions 
to  this  assumption  of  the  orthodox  economists. 

Bohm-Bawerk  first  shows  by  Bicardo's  own  admis- 
sions that  rare  statues  and  pictures,  scarce  books  and 
coins,  wines  of  a  peculiar  flavor,  and  the  products  of 
the  better  lands  are  exceptions  to  this  assumed  prev- 
alence of  freedom  in  production.  To  these  Bohm- 
Bawerk  adds  the  products  of  more  skilful  laborers,  as 
well  as  all  goods  in  whose  production  some  patent, 
copyright,  or  trade  secret  plays  a  part.  Bohm- 
Bawerk  also  calls  attention  to  the  fact  that  even  so- 
called  freely  reproducible  goods  are  only  such  during 
the  brief  interval  that  their  price  is  actually  at  the 
normal  point,  or  that  during  their  fluctuations  on 
either  side  of  the  normal  they  cease  to  be  freely 
reproducible  goods. 

Finally,  we  come  to  an  exception  that  bears  di- 
rectly upon  the  interest  problem,  for  Bicardo  him- 
self declares  that  "  the  principle  that  the  quantity  of 
labor  employed  on  the  production  of  goods  regulates 


148  VALUE  AND  DISTRIBUTION. 

their  relative  value  suffers  considerable  modification 
by  the  employment  of  machinery  and  other  fixed  and 
durable  capital."  ("  Principles  of  Political  Econ- 
omy/' Bohn  edition,  p.  23.  Heading  of  section.) 
As  in  this  last  exception  we  have  the  crux  of  the 
whole  discussion,  we  would  not  seem  to  beg  the  ques- 
tion by  too  strong  an  insistence  upon  it  at  this  stage 
of  the  argument.  Its  introduction  at  this  point  will, 
however,  serve  to  show  that  the  contentions  of  the 
socialist  writers  have  not  that  unqualified  support  of 
the  orthodox  economists  which  the  former  would  fain 
believe. 

On  the  other  hand,  it  should  be  noted  that  a  very 
important  group  of  the  admitted  exceptions  is  elimi- 
nated if  we  have  in  mind  a  marginal  cost  theory.  In 
that  case  the  products  of  the  better  land,  more  ef- 
ficient machines,  and  more  skilful  labor  cease  to  be 
exceptions  to  our  theory  of  price.  But  even  with 
these  eliminated  we  still  have  a  formidable  list  of  ex- 
ceptions. When  to  all  goods  in  whose  production  a 
patent  right,  trade  secret,  import  duty,  pool,  or  trust 
plays  a  part,  we  add  all  so-called  freely  reprodu- 
cible goods,  except  for  the  brief  interval  that  their 
price  is  actually  at  the  normal  point,  we  have  a  very 
serious  list  of  exceptions  to  the  contention  that  the 
value  of  goods  is  determined  by  the  labor  expended 
in  their  production. 

This  argument,  based  upon  the  general  prevalence 
of  scarcity  goods,  occupies  considerable  space  in  Bohm- 
Bawerk's  criticism  of  the  Exploitation  Theory,  and 


THE  EXPLOITATION  THEORY  OF  INTEREST.  149 

yet  it  must  be  admitted  that  it  does  not  seriously 
affect  the  ultimate  contention  of  the  socialist  writers. 
It  is  clearly  open  to  them  to  reply,  Your  whole 
argument  is  a  manifest  admission  of  our  claim.  We 
do  not  deny  the  existence  of  scarcity  values  as  so- 
ciety is  now  constituted.  On  the  contrary,  we  hold 
that  the  present  inequitable  distribution  of  the  social 
product  is  due  to  the  existence  of  these  monopoly 
goods.  Under  a  socialistic  regime,  however,  all  such 
scarcity  or  monopoly  prices  would  disappear,  and  the 
value  of  all  goods  would  be  measured  by  the  quan- 
tity of  labor  required  to  produce  them. 

(b)  WHAT  LABOR  is  THE  STANDARD  OF  VALUE  ? — 
But  even  though  we  accept  the  teaching  of  the  so- 
cialists, that  value  is  measured  by  quantity  of  labor, 
we  have  in  this  a  proposition  that  is  confronted  by 
serious  practical  difficulties.  If  labor  is  the  source 
of  all  value,  the  question  naturally  arises,  By  what 
labor  shall  this  value  be  measured?  The  man  that 
produced  the  commodity  may  have  been  lazy  and  in- 
different ;  must  we  pay  him  for  his  time,  no  matter 
how  long  he  takes  to  complete  the  work,  or  shall  we 
pay  him  according  to  the  time  of  the  most  expert 
man  we  can  find  ?  Marx  answers  that  we  must  pay 
for  any  commodity  "the  socially  necessary  labor 
time,"  and  this  he  defines  as  the  "  labor  time  re- 
quired to  produce  a  use  value  under  the  conditions 
of  production  that  are  socially  normal  at  the  time, 
and  with  the  socially  necessary  degree  of  skill  and 
intensity  of  labor." 


150  VALUE  AND  DISTRIBUTION. 

"  The  single  commodity  here  is  to  be  counted  as 
the  average  sample  of  its  class.  Commodities,  there- 
fore, in  which  equally  great  amounts  of  labor  are 
contained,  or  which  could  be  made  in  the  same  labor 
time,  have  the  same  amount  of  value.  The  value  of 
one  commodity  is  to  the  value  of  every  other  com- 
modity as  the  labor  time  necessary  to  the  production 
of  the  one  is  to  the  labor  time  necessary  to  the 
production  of  the  other.  ...  As  values  all  com- 
modities are  only  definite  amounts  of  congealed  labor 
time."  * 

Now,  no  matter  how  we  may  attempt  to  disguise 
the  facts  by  the  use  of  such  phrases  as  "  the  socially 
necessary  degree  of  skill  and  labor,"  it  still  remains 
true  that  the  more  capable  man  will  not  exert  his 
full  power  if  his  reward  is  no  greater  than  that  of  a 
less  capable  and  possibly  lazy  companion.  This  is 
something  that  is  so  inherent  in  the  nature  of  man- 
kind that  its  elimination  can  only  be  effected  by  sub- 
jective changes  in  man  himself.  Structural  changes 
in  society,  the  introduction,  for  instance,  of  a  social- 
istic regime,  can  only  remotely  affect  the  problem. 
For,  despite  all  our  assumptions  to  the  contrary,  men 
as  actually  constituted  are  individuals  ;  they  differ  in 
skill  and  ability,  and  they  demand  that  they  shall  be 
specially  rewarded  for  the  exertion  of  any  superior 
power  which  they  possess.  And  yet  if  the  socialist 
theories  mean  anything,  they  mean  that  labor,  like 

*  Das  Capital,  second  edition,  p.  10. 


THE  EXPLOITATION  THEORY  OF  INTEREST. 

all  other  goods,  must  be  rated  according  to  the  pain 
or  disutility  endured. 

Marx  has  attempted  to  meet  this  difficulty  as  fol- 
lows :  "  Complicated  labor  counts  only  as  strength- 
ened or  rather  multiplied  simple  labor,  so  that  a 
smaller  quantity  of  complicated  labor  is  equal  to  a 
greater  quantity  of  simple  labor.  Experience  shows 
that  this  reduction  is  constantly  made.  A  com- 
modity may  be  the  product  af  the  most  complicated 
labor ;  its  value  makes  it  equal  to  the  product  of  sim- 
ple labor,  and  represents,  therefore,  only  a  definite 
quantity  of  simple  labor."  * 

Does  this,  however,  solve  our  difficulty?  It  is 
undoubtedly  true  that  if  a  day's  labor  of  a  skilled 
physician  or  artist  is  worth  fifty  dollars,  and  a  day's 
labor  of  a  porter  or  navvy  is  worth  only  one  dollar, 
then  the  pay  of  the  former  may  be  expressed  as  fifty 
times  the  pay  of  the  latter.  But  does  this  help  us  in 
any  way  ?  According  to  the  contention  of  the  social- 
ists, the  pay  of  labor  should  be  equated  to  the  pain 
or  disutility  endured.  How,  then,  are  we  to  recon- 
cile this  with  the  fact  that  while  one  man  receives 
one  dollar  another  man  receives,  and  must  receive  as 
men  are  constituted,  fifty  dollars  for  a  day's  labor  in- 
volving even  less  fatigue  ?  Nor  is  it  a  good  and  suf- 
ficient answer  to  this  question  to  say  that  the  physi- 
cian or  artist  has  expended  much  time,  money,  and 

*  Das  Capital,  p.  19.     See  also  Kicardo's  Principles,  Chap. 
I.  Sect.  II.  p.  13. 


152  VALUE  AND  DISTRIBUTION. 

labor  in  acquiring  his  skill,  for  it  may  be  retorted 
that  much  of  their  ability  is  natural  and  not  acquired. 
In  other  words,  the  value  of  labor,  as  of  all  commodi- 
ties, depends  fundamentally  upon  its  utility  and  sup- 
ply ;  pain  or  disutility  only  entering  into  the  problem 
when  it  is  the  cause  of  the  limitation  of  the  supply. 

78.  Contention  that  Capital  is  not  an  Original 
and  Independent  Source  of  Value.  —  Rodbertus 
writes :  "  Every  product  that  comes  to  us  through 
labor  in  the  shape  of  a  good  is,  economically  speak- 
ing, to  be  placed  to  the  credit  of  human  labor  alone, 
because  labor  is  the  only  original  power,  and  also 
the  only  original  cost  with  which  human  economy  is 
concerned."  *  This,  of  course,  excludes  both  nature 
and  capital  as  original  and  independent  factors  of 
production. 

(a)  NATURAL  GOODS  ARE  SOMETIMES  ORIGINAL 
POWERS. — With  regard  to  natural  goods,  Rodbertus 
writes  :  "  All  other  goods  except  those  that  cost  labor, 
however  useful  or  necessary  they  may  be  to  mankind, 
are  natural  goods,  and  have  no  place  in  economic 
consideration.  .  .  .  Man  may  be  thankful  for  what 
nature  has  done  beforehand  in  the  case  of  economic 
goods,  as  it  has  spared  him  so  much  extra  labor,  but 
economy  takes  no  notice  of  them  only  in  so  far  as 
labor  has  completed  the  work  of  nature."  f 

*  Erklarung  und  Abhilfe,  p.  160.  Similarly,  Sociale  Frage, 
p.  69. 

I  Sociale  Frage,  p.  69. 


THE  EXPLOITATION  THEOKY  OF  INTEREST.  153 

That  this  is  true  of  those  natural  goods,  like  air 
and  water,  whose  supply  is  practically  unlimited  no 
one  will  question.  But  what  shall  we  say  about 
those  natural  goods  whose  supply  suffers  serious  limi- 
tations ?  We  can  hardly  say  that  "  economy  takes 
no  notice  of  them"  when  we  are  constrained  to  econo- 
mize in  our  employment  of  them.  By  socializing 
these  goods  we  would  prevent  particular  individuals 
from  monopolizing  them  to  their  own  peculiar  ad- 
vantage. But  we  would  not  thereby  remove  them 
from  the  category  of  economic  goods. 

(b)  CAPITAL  AN  INDEPENDENT  POWER. — That  cap- 
ital is  not  an  original  power  will  be  generally  ad- 
mitted, but  when  it  is  further  urged  that  it  is  not 
an  independent  power  or  factor  in  production,  the 
conclusion  does  not  seem  to  be  so  well  founded. 

First.  As  we  have  just  seen,  labor  is  not  the  only 
original  power  deserving  economic  consideration. 
Natural  forces  if  limited  in  supply  share  with  labor 
this  unique  distinction.  Hence,  in  labor  and  the 
other  natural  forces  which  we  are  compelled  to  econ- 
omize, we  have  the  two  factors  that  join  in  the  crea- 
tion of  the  secondary  power — capital.  It  is,  there- 
fore, impossible  to  resolve  all  capital  into  labor  alone. 

Secondly.  Though  it  were  true  that  all  capital  could 
be  resolved  into  labor,  as  the  original  source  from 
which  it  sprung,  that  does  not  justify  the  claim  that 
capital  is  not  now  an  independent  factor.  When  we 
show  that  a  particular  organic  form  has  been  evolved 
from  some  protoplasm  of  the  past,  we  do  not  hold 


154  VALUE  AND  DISTRIBUTION. 

that  it  is  not  now  an  independent  species  far  removed 
from  that  from  which  it  was  evolved. 

Thirdly.  Though  mankind  labored  never  so  assid- 
uously, the  increase  of  the  supply  of  capital  neces- 
sarily involves  the  postponement  of  some  enjoyment, 
some  abstinence  or  disutility  endured  by  the  marginal 
saver  or  capitalist.  Hence  while  it  is  largely  true 
that  without  labor  there  would  be  no  capital,  yet  it  is 
equally  true  that  without  the  abstinence  of  the  mar- 
ginal saver  there  would  likewise  be  no  capital. 

79.  The  Contention  that  the  Whole  Product  be- 
longs in  Equity  to  the  Laborer. — This  brings  us  to 
the  third  and  last  proposition,  that  "according  to 
nature  and  the  '  pure  idea  of  justice'  the  whole  value 
of  the  product  ought  to  belong  without  deduction  to 
the  laborer  who  produced  it."  That  this  contention 
has  been  successfully  attacked  by  Bohm-Bawerk  can- 
not, I  think,  be  denied.  His  argument  is,  in  brief,  as 
follows : 

That  the  laborer  should  at  the  present  time  re- 
ceive the  present  value  of  his  product,  or  that  at 
some  future  time  he  should  receive  the  now  future 
value  of  the  product,  may  be  consonant  with  the 
strictest  equity,  but  that  he  should  at  the  present 
time  receive  the  future  value  of  his  product  is 
neither  just  or  equitable,  so  long  as  men  generally 
prefer  a  hundred  dollars  in  hand  to-day  rather  than 
the  most  positive  assurance  of  receiving  a  like  amount 
at  some  future  date. 

Let  us  take  the  case  of  wine.     As  is  well  known, 


THE  EXPLOITATION  THEORY  OF  INTEREST.  155 

wine  improves  with  time,  and  with  this  improvement 
there  is  a  corresponding  advance  in  price.  A  cask 
of  wine  which  was  worth  ten  dollars  when  new  may 
at  the  end  of  ten  years  be  worth  twenty  dollars.  To 
whom  shall  this  increase  be  credited  ?  If  we  say  that 
it  belongs  to  the  laborers,  we  must  show  in  what  way 
they  have  a  claim  upon  an  increase  in  value  that 
takes  place  long  after  they  have  ceased  to  expend 
any  effort  in  the  production,  of  the  wine.  If  we 
answer  that  labor  is  the  only  source  of  value,  hence 
this  increase  in  value  should  be  distributed  among 
the  laborers  who  were  originally  employed  in  its  pro- 
duction, we,  of  course,  beg  the  whole  question,  since 
we  are  here  trying  to  determine  whether  or  not  the 
laborer  is  entitled  to  the  entire  value  of  the  product. 
Suppose,  however,  we  admit  that  the  laborer's 
claim  to  this  increase  in  value  is  well  founded,  how, 
then,  are  we  to  determine  the  amount  to  be  paid  to 
the  laborers  ?  If  we  give  them  the  entire  value  of 
the  wine  at  the  time  of  the  vintage  (ten  dollars),  we 
leave  in  the  hands  of  the  employer  a  surplus  of 
which,  according  to  Rodbertus  and  Marx,  the  laborer 
is  robbed.  Shall  we,  then,  pay  to  the  laborer  the 
value  of  the  wine  at  the  end  of  the  ten  years,  or 
twenty  dollars  ?  If  we  decide  this  in  the  affirmative 
we  are  confronted  with  the  question,  How  do  we 
know  how  long  it  will  be  before  the  wine  is  sold  ? 
It  might  be  that  in  the  second  year  after  the  vintage 
the  employer,  from  stress  of  circumstances,  would  be 
compelled  to  sell.  He  would  then  have  paid  twenty 


156  VALUE  AND  DISTRIBUTION. 

dollars  for  wine  that  only  brought,  say,  twelve  dollars. 
Again,  if  he  only  paid  twelve  dollars,  then  what  must 
he  pay  the  laborers  who  are  now  producing  new  wine, 
which  he  is  compelled  to  sell  for  ten  dollars  ?  Will 
the  latter  grant  that  ten  dollars  is  a  just  wage  of  labor 
when  others  receive  twelve  dollars  for  exactly  the 
same  labor  ? 

Again,  we  will  take  a  case  in  which  all  possible 
exploitation  by  a  capitalist  employer  is  eliminated. 
Five  laborers  enter  into  a  co-operative  agreement  to 
construct  a  machine.  We  will  assume  that  it  takes 
five  years  to  complete  the  machine,  and  that  at  the 
end  of  that  time  it  is  sold  for  five  hundred  and  fifty 
dollars.  As  they  conduct  the  enterprise  without 
help  from  any  one  else,  they  will  at  the  end  of  five 
years  be  able  to  divide  among  themselves  the  en- 
tire value  of  the  product,  or  five  hundred  and  fifty 
dollars.  Let  us  bring  this  into  a  little  closer  corre- 
spondence with  actual  life  by  saying  that  one  man 
mines  the  ore,  coal,  limestone,  etc. ;  another  smelts 
these  and  runs  the  iron  into  pigs ;  another  makes 
the  necessary  patterns ;  another  the  castings ;  while 
the  last  does  the  work  in  the  machine-shop  in  the 
completion  of  the  machine.  As  these  processes  are 
necessarily  consecutive,  we  can  assume  that  each 
takes  one  of  the  five  years  necessary  for  the  'com- 
pletion of  the  machine.  Now,  under  these  circum- 
stances, how  are  we  to  determine  how  much  of  the 
five  hundred  and  fifty  dollars  each  man  should  re- 
ceive when  the  machine  is  completed  and  sold  ?  If 


THE  EXPLOITATION  THEORY  OF  INTEREST.  157 

we  say  they  should  receive  one-fifth  each,  or  one 
hundred  and  ten  dollars,  and  attempt  so  to  divide 
the  total  value,  we  at  once  find  ourselves  in  serious 
trouble,  for  while  the  machinist  would  be  satisfied, 
the  miner  is  likely  to  make  vigorous  protest  against 
the  gross  injustice  of  any  such  division,  for  he  re- 
ceives one  hundred  and  ten  dollars  four  years  after 
the  completion  of  his  work,  while  the  machinist  is 
paid  the  same  amount,  one  hundred  and  ten  dollars, 
upon  the  completion  of  his  work.  But  suppose 
that,  despite  such  protest,  society  should  insist  upon 
this  mode  of  distribution,  what  would  result?  So 
long  as  it  remained  true  that  men  prefer  present 
goods  to  future  goods,  all  men  would  seek  to  enter 
those  industries  or  branches  of  employment  that 
turned  out  finished  products.  This  must  force  down 
the  wages  in  such  industries  as  compared  with  those 
more  remote  from  the  finishing  process  until  a  suf- 
ficient premium  were  established  to  induce  men  to 
engage  in  these  latter  industries.  In  other  words, 
though  there  were  no  capitalist  to  exploit  the  laborer, 
interest  must  arise  in  order  to  satisfy  that  "  idea  of 
pure  justice"  to  which  Eodbertus  has  appealed  in 
his  attack  upon  interest." 

In  passing  upon  the  work  of  the  socialist,  it  must 
be  remembered  that  their  errors  are  due  in  no  small 
degree  to  the  defective  analysis  of  the  orthodox  econ- 
omists. Profits  and  interest  are  so  frequently  em- 
ployed by  the  latter  writers  as  interchangeable  terms, 
that  it  is  hardly  to  be  wondered  at  that  the  socialists 


158  VALUE  AND  DISTRIBUTION. 

should  direct  their  attack  against  the  whole  complex 
return  secured  by  the  capitalist.  Later  investiga- 
tions have  shown  that  in  this  total  or  complex  re- 
turn for  the  use  of  concrete  forms  of  capital  there 
are  several  different  forms  of  surplus, — rent,  profit, 
and  interest.  And  that  no  matter  how  open  the 
first  two  of  these  forms  may  be  to  the  line  of  attack 
employed  by  socialist  writers,  the  last  is  absolutely 
impregnable  against  such  attacks,  and  this  for  the 
reason  that  it  is  a  case  of  normal  value,  and  so  is  de- 
termined under  conditions  of  ideal  free  competition. 
The  importance  of  the  work  done  by  the  socialist 
writers  lay  largely  in  their  vigorous  protest  against 
the  assumption  of  an  economic  man,  the  iron  law 
of  wages,  etc.  Their  constructive  contributions  to 
economic  theory,  however,  should  not  be  ignored. 
The  accent  which  they  have  thrown  upon  the  inti- 
mate connection  that  exists  between  the  phenomena 
of  value  and  price  on  the  one  side  and  the  phe- 
nomena of  distribution  on  the  other  is  important. 
Again,  as  I  shall  endeavor  to  show  in  a  later  chapter, 
it  was  Marx  who  first  recognized  the  important  dis- 
tinction between  labor  in  the  concrete  form  of  spin- 
ner, weaver,  etc.,  and  labor  conceived  as  an  abstract 
mobile  fund.  The  similarity  between  capital  and 
labor  in  this  respect  Marx,  of  course,  failed  to  notice, 
but  that  he  had  some  grasp  of  these  two  conceptions 
of  labor  can,  we  think,  be  shown.  These  are  the 
conceptions  which  J.  B.  Clark  has  developed  with 
such  skill  and  clearness. 


CHAPTER    III. 

THE   USB   THEORY    OP    INTEREST. 

THE  advocates  of  the  Cost  Theory  of  Value  held 
that  under  free  competition  the  value  of  a  product 
cannot  exceed  its  cost  of  production,  from  this  it 
follows  that  the  value  of  the  share  of  this  product 
which  is  due  to  the  use  of  capital  cannot  exceed  the 
value  of  that  capital.  This  raises  the  question,  How, 
then,  are  we  to  explain  the  fact  that  the  share  of  the 
product  that  goes  to  the  owner  of  capital  frequently 
contains  a  surplus  above  the  value  of  the  capital 
itself,  a  surplus  to  which  the  name  interest  has  been 
given  ?  In  attempting  to  explain  this  seeming  con- 
tradiction the  question  arose  whether  there  was  not 
some  other  sacrifice  than  that  represented  by  the 
capital  itself.  If  there  is  such  an  additional  sacri- 
fice, it  might  be  equated  to  this  surplus  value  or 
interest.  In  that  case  the  Cost  Theory  would  still 
remain  true,  since  the  value  of  the  product  would 
again  equal  its  cost  of  production.  The  search  for 
this  additional  sacrifice  has  resulted  in  two  distinct 
theories  of  interest, — the  Use  Theory  and  the  Ab- 
stinence Theory.  It  is  to  an  examination  of  the 
first  of  these  theories  that  the  present  chapter  will 
be  devoted. 

The  Use  Theory  asserts,  in  brief,  that  in  capital- 
istic production  there  is  a  sacrifice  not  only  of  the 


159 


160  YALUE  AND  DISTRIBUTION. 

material  substance  of  capital  but  also  a  sacrifice  of  the 
use  of  the  capital  during  the  period  of  production. 

This  theory  had  a  large  following,  especially  among 
the  abler  German  economists, — Herman,  Nebenius, 
and  others  giving  it  their  support.  Its  best  and 
fullest  statement  is  found  in  the  work  of  the  bril- 
liant Austrian  economist,  Carl  Menger.  His  ap- 
proach to  the  question  is,  however,  somewhat  differ- 
ent from  that  of  the  earlier  writers,  since  he  starts 
out  from  the  stand-point  of  the  Marginal  Utility 
Theory  of  Value.  But  for  this  very  reason  it  is 
undoubtedly  the  best  possible  statement  of  the  Use 
Theory  of  Interest. 

80.  Monger's  Statement  of  the  Theory.  —  This 
writer  first  holds  that  in  value  the  causal  relation  is 
not,  as  the  older  economists  held,  from  value  of  pro- 
ductive goods  to  value  of  product,  but  from  value 
of  product  to  value  of  productive  goods.  It  must, 
however,  be  borne  in  mind  that  whichever  order  is 
accepted,  it  still  remains  true  that,  under  free  compe- 
tition, the  value  of  the  product  and  the  value  of  the 
productive  good  are  necessarily  equal.  How,  then, 
can  the  existence  of  surplus  value  or  interest  be  ex- 
plained ? 

To  this  Menger  gives  the  following  answer :  "  The 
transformation  of  means  of  production  into  products 
(or,  shortly,  Production)  always  demands  a  certain, 
period  of  time,  sometimes  long,  sometimes  short. 
For  the  purpose  of  production  it  is  necessary  that  a 
person  should  not  only  have  the  productive  goods  at 


THE  USE  THEORY  OF  INTEREST. 

his  disposal  for  a  single  moment  inside  that  period  of 
time,  but  should  retain  them  at  his  disposal  and  bind 
them  together  in  the  process  of  production  over  the 
whole  period  of  time. 

"  The  use  of  capital,  or  the  disposal  over  capital, 
thus  described,  in  so  far  as  it  is  in  demand  and  is  not 
to  be  had  in  sufficient  quantity,  may  now  obtain  a 
value,  or,  in  other  words,  may  become  an  economical 
good.  When  this  happens,  as  is  usually  the  case, 
then,  over  and  above  the  other  means  of  production 
employed  in  the  making  of  a  concrete  product  (over 
and  above, — e.g.,  the  raw  materials,  auxiliary  mate- 
rials, labor,  and  so  on),  there  enters  into  the  sum  of 
value  contained  in  the  anticipated  product  the  dis- 
posal over  those  goods  that  are  required  for  the  re- 
duction or  the  use  of  capital.  And  since,  on  that 
account,  in  this  sum  of  value  there  must  remain 
something  for  the  economical  good  we  have  called 
'  use  of  capital/  the  other  means  of  production  can- 
not account  for  the  full  amount  of  the  value  of  the 
anticipated  product.  This  is  the  origin  of  the  dif- 
ference in  value  between  the  concrete  capital  thrown 
into  production  and  the  product;  and  this  at  the 
same  time  is  the  origin  of  interest." 

This  theory  clearly  rests  upon  the  contention  that 
there  is  a  use  of  capital  which  is  separate  and  dis- 
tinct from  that  which  is  involved  in  the  using  up 
of  the  capital  itself.  It,  therefore,  follows  that  if  this 
position  cannot  be  maintained,  the  whole  theory  must 

be  abandoned. 

11 


162  VALUE   AND  DISTRIBUTION. 

81.  Criticism  of  Monger's  Statement. — This  theory 
seems  to  find  some  confirmation  in  our  experience 
with  durable  consumption  goods ;  as  in  the  case  of  a 
rented  house.  The  house  itself  or  the  capital  is  re- 
turned to  the  owner  at  the  expiration  of  the  lease,  in 
spite  of  the  fact  that  it  has  been  a  source  of  income 
during  the  entire  period  of  the  lease ;  it  would  here 
seem  that  there  is  a  use  of  the  house  which  is  quite 
distinct  from  the  using  up  of  the  house. 

If,  however,  the  case  of  a  more  perishable  good,  as 
a  plough,  is  examined,  there  is  no  difficulty  in  seeing 
that  just  as  the  rendering  of  services  by  the  laborer 
involves  a  using  up  of  human  tissue,  so  the  render- 
ing of  services  by  a  material  commodity  involves  the 
using  up  of  its  tissue.  The  only  difference  between 
the  cases  of  perishable  and  durable  goods  lies  in  the 
fact  that  the  perishable  goods  are  more  rapidly  con- 
sumed. A  moment's  consideration  will  make  it  clear 
that  even  in  the  case  of  the  more  durable  consump- 
tion goods  there  is  of  necessity  the  same  breaking 
down  of  tissue.  They  do  not  render  all  of  their 
services  at  once,  as  in  the  case  of  powder,  but  instead 
only  a  small  part  of  their  possible  services  are  given 
off  at  a  time,  while  a  balance,  so  large  that  it  seems 
to  be  the  whole,  remains  in  the  possession  of  the 
owner.  It  is  this  fact  that  seems  to  give  warrant  to 
the  assumption  that  there  is  a  use  of  capital  that  can 
be  separated  from  the  using  up  of  the  capital.  And 
yet  one  has  only  to  consider  it  well  to  realize  that 
there  is  no  conceivable  use  of  any  form  of  capital,  not 


THE  USE  THEORY  OF  INTEREST.  163 

even  the  most  durable,  that  does  not  involve  a  using 
up  of  that  capital.  As  Bohm-Bawerk  has  well  said, 
"  Any  use  of  material  goods  which  does  not  consist 
in  the  receiving  from  them  of  useful  results  due  to 
their  inherent  powers  or  forms  of  energy  is  abso- 
lutely unthinkable." 

Yet,  despite  the  complete  breaking  down  of  the 
Use  Theory,  when  critically  examined,  it  had  one 
great  merit.  It  accented  the  importance  of  the  time 
element  in  all  capitalistic  production.  This  proposi- 
tion will  be  fully  developed  in  the  discussion  of 
Time  and  Space  Utilities,  page  183.  For  the  present 
it  should  be  noted  that,  whatever  the  shortcomings 
of  the  Use  Theory  may  be,  it  must  be  credited  with 
a  clear  appreciation  of  this  time  function  in  the 
problem  of  interest.* 

*  Those  desiring  a  fuller  review  of  the  "  Use  Theory"  than 
is  here  given  are  referred  to  Bohm-Bawerk' s  "  Capital  and 
Interest,"  Book  III. 


CHAPTER    IV.  » 

THE  EARLIER  PRODUCTIVITY  THEORY  OF  INTEREST. 

I.  CONTINENTAL  WRITERS  FAIL  TO  SEE  THAT  INCREASE  IN 
PRODUCT  DOES  NOT  NECESSARILY  MEAN  AN  INCREASE  IN 
VALUE. 

82.  Say. — Among  the  first  to  give  definite  state- 
ment to  this  theory  was  J.  B.  Say,  who  wrote  :  "  The 
impossibility  of  obtaining  a  product  without  the  co- 
operation of  some  form  of  capital  compels  the  con- 
sumer to  pay  for  that  product  a  price  sufficient  to 
allow  the  entrepreneur,  who  takes  on  himself  the  work 
of  production,  to  buy  the  services  of  that  necessary 
instrument."  *  Again,  he  writes  :  "  If  capital  had 
not  in  itself  a  productive  power,  independent  of  the 
labor  that  has  created  it,  how  could  it  be  that  capital, 
to  all  eternity,  produces  an  income  independent  of  the 
profit  of  the  industrial  activity  which  employs  it  ?"  f 

That  in  some  way  a  surplus  accrues  to  the  benefit 
of  those  that  control  this  particular  instrument  of 
production  is,  of  course,  granted  by  all  parties  to  the 
discussion  ;  but  the  question  is,  How  does  this  surplus 
arise  ?  Nor  is  it  a  satisfactory  answer  to  tell  us  that 
since  "capital  to  all  eternity  produces  an  income/' 
therefore  capital  must  be  productive.  For  the  so- 

*  Traite  d'Economio  Politique,  p.  395. 
f  Ibid.,  p.  71. 
164 


THE  EARLIER  PRODUCTIVITY  THEORY  OF  INTEREST.   165 

cialist  might  answer  that  the  capitalist  secures  a  sur- 
plus by  exploiting  the  laborers  under  the  protection 
of  law  and  custom.  Yet  despite  this  serious  ellipsis 
in  Say's  argument  his  views  obtained  wide  acceptance 
in  both  France  and  Germany. 

83.  Riedel. — Among  Germans,  Eiedel  writes:  "The 
productivity  which  capital  when  employed  univer- 
sally possesses  is  manifest,  in  observation  of  the  fact 
that  material  values  which  have  been  employed,  with 
a  view  to  production,  in  aiding  nature  and  labor  are, 
as  a  rule,  not  only  replaced,  but  assist  towards  a 
surplus  of  material  values,  which  surplus  could  not 
be  brought  into  existence  without  them.  .  .  .  The 
product  of  capital  is  to  be  regarded  as  that  which 
in  any  case  results  from  an  employment  of  capital 
towards  the  origination  of  material  values,  after  de- 
duction of  the  value  of  that  assistance  which  nature 
and  labor  afford  to  the  employment  of  capital.  .  .  . 
It  is  always  incorrect  to  ascribe  the  product  of  capi- 
tal to  the  working  forces  of  nature  or  labor  which 
the  capital  needs  in  order  that  it  may  be  employed. 
Capital  is  an  independent  force,  as  labor  and  nature 
are,  and  in  most  cases  does  not  need  them  more  than 
they  need  it."  * 

The  point  of  paramount  importance  in  these  pas- 
sages is  found  in  the  opening  statement,  that  the  pro- 
ductivity of  capital  is  manifest  on  observation  of  the 


*  National  Oekonomie  oder  Volkswirthschaft,    1838.  (1 
366.) 


166  VALUE  AND   DISTRIBUTION. 

surplus  value,  which  could  not  be  brought  into  exist- 
ence without  this  capital.  One  is  here  constrained  to 
ask,  How  do  we  get  this  surplus  value  ?  Surplus  of 
material  commodities  may  be  granted,  but  how  is  this 
transmuted  into  a  "  surplus  of  material  values"  ? 
This,  indeed,  is  the  crucial  point  in  this  whole  dis- 
cussion, yet  it  is  one  which  these  continental  writers 
failed  even  to  raise.  They  show,  and  have  no  trouble 
in  showing,  the  productivity  of  capital  in  terms  of 
physical  commodities,  but  nowhere  do  they  attempt 
to  show  how  or  why  this  is  equivalent  to  an  increase 
in  value.  They  simply  assume  this  step  in  the  argu- 
ment. 

It  does  not  meet  the  difficulty  to  say  that,  as  a 
matter  of  fact,  the  employment  of  capital  usually 
results  not  merely  in  a  surplus  of  commodities  but 
as  well  in  a  surplus  of  value.  The  question  that 
troubles  us  is  not  one  of  fact,  but  the  reasons  for  this 
fact,  or  the  explanation  of  the  process  by  which  this 
fact  is  realized.  When  we  say  the  productivity  of 
capital  is  manifest  from  the  observation  of  the  exist- 
ence of  surplus  value,  we  simply  avoid  the  real  diffi- 
culty in  the  matter.  The  only  thing  assured  in  the 
so-called  productivity  of  capital  is  the  increase  in 
commodities.  But  that  this  does  not  necessarily 
imply  an  increase  in  value  is  manifest,  for  with  the 
increase  of  commodities  there  is  usually  a  correspond- 
ing decrease  in  marginal  utility  or  of  value,  as  we 
ordinarily  use  this  latter  term. 

Suppose,  for  instance,  that  in  the  present  condition 


THE  EARLIER  PRODUCTIVITY  THEORY  OF  INTEREST.    107 

of  the  shoe  industry  a  given  amount  of  labor  would 
produce  one  hundred  pairs  of  shoes,  and  that  with 
this  supply  on  the  market  shoes  would  have  a  mar- 
ginal utility  of  10.  Later,  a  new  machine  is  intro- 
duced, so  that  with  the  same  amount  of  labor  we  can 
produce  two  hundred  pairs  of  shoes.  Let  us  further 
assume  that  with  this  supply  shoes  will  have  a  mar- 
ginal utility  of  4.  Here,  then,  we  would  have  a  very 
positive  increase  of  commodities  with  an  equally 
serious  decrease  in  the  marginal  utility  or  value  per 
unit.  It  is  true  that  there  is  still  another  sense  in 
which  the  term  value  is  employed, — namely,  total 
value.  But  it  may  readily  happen  that  even  this 
may  decline  with  the  increase  in  quantity.  For — 
100  X  10  =  1000  units  of  total  value. 
200  X  4  =  800  units  of  total  value. 

In  other  words,  the  increase  in  commodities  has 
resulted  not  only  in  a  decline  in  marginal  utility,  or 
value  per  unit,  but  likewise  in  a  decline  of  total 
value,  so  that  in  no  sense  has  there  been  an  increase 
in  value. 

So  far,  then,  as  these  earlier  writers  are  con- 
cerned, they  have  nowhere  shown  the  existence  of 
a  surplus  value  due  to  the  productivity  of  capital. 
They  have  no  difficulty  in  showing  a  surplus  in 
material  commodities,  but  they  have  not  shown? 
nor  can  they  show,  that  this  necessarily  result? 
in  an  increase  of  value.  Men  may  increase  their 
product  to  any  extent  they  please,  but  unless  there 
is  some  cause  for  a  limitation  of  the  supply  of 


168  VALUE   AND   DISTRIBUTION. 

these    commodities,    there    can    be    no    increase    in 
value. 

II.  ENGLISH  WRITERS  SAW  THAT  INCREASE  IN  PRODUCT 
DOES  NOT  NECESSARILY  MEAN  AN  INCREASE  IN  VALUE, 
BUT  FAILED  TO  SUPPLY  THE  ELLIPSIS  IN  THE  ARGU- 
MENT. 

In  England  Lauderdale  and  Malthus  attempted  to 
fill  out  the  ellipsis  in  the  arguments  of  the  conti- 
nental adherents  of  the  productivity  theory  of  in- 
terest by  inserting  a  middle  term  that  would  serve  to 
connect  surplus  product  with  surplus  value. 

84.  Lauderdale. — This  writer  tells  us  that  "In 
every  instance  where  capital  is  so  employed  as  to 
produce  a  profit  it  uniformly  arises  either  from  its 
supplanting  a  portion  of  labor  which  would  other- 
wise be  performed  by  the  hand  of  man,  or  from  its 
performing  a  portion  of  labor,  which  is  beyond  the 
reach  of  the  personal  exertions  of  man  to  accomplish. 

"  Suppose,  for  example,  one  man  with  a  loom 
should  be  capable  of  making  three  pairs  of  stock- 
ings a  day,  and  that  it  would  require  six  knitters  to 
perform  the  same  work  with  equal  elegance  in  the 
same  time ;  it  is  obvious  that  the  proprietor  of  the 
loom  might  demand  for  making  his  three  pairs  of 
stockings  the  wages  of  five  knitters,  and  that  he 
would  receive  them ;  because  the  consumer  by  dealing 
with  him  rather  than  the  knitters  would  save  in  the 
purchase  of  the  stockings  the  wages  of  one  knitter."* 

*  Inquiry  into  the  Nature  and  Origin  of  Public  Wealth, 
pp.  161,  165. 


THE  EARLIER  PRODUCTIVITY  THEORY  OF  INTEREST.    169 

It  is  in  this  saving  of  labor,  then,  that  this  writer 
would  find  the  middle  term,  or  his  explanation  of 
interest  on  capital.  But  the  question  may  well  be 
asked,  Has  he  really  said  anything  bearing  upon 
that  form  of  surplus  value  which  here  interests  us  ? 
He  has  shown  that  the  capitalist  will  receive  a  sur- 
plus value  over  and  above  his  labor  cost  of  produc- 
tion, but  as  this  surplus  includes  the  wear  and  tear 
of  capital,  it  is  not  a  surplus  of  value  over  and 
above  the  maintenance  of  the  original  capital.  In 
other  words,  it  is  not  interest. 

Lauderdale  seems  to  feel  in  a  vague  way  the  un- 
satisfactory nature  of  his  solution,  for  he  says,  "  The 
small  profit  which  the  proprietors  of  machinery 
generally  acquire,  when  compared  with  the  wages 
and  labor  which  the  machine  supplants,  may  per- 
haps create  a  suspicion  of  the  rectitude  of  this 
opinion.  Some  fire-engines,  for  instance,  draw  more 
water  from  a  coal-pit  in  one  day  than  could  be  con- 
veyed on  the  shoulders  of  three  hundred  men,  even 
assisted  by  the  machinery  of  buckets;  and  a  fire- 
engine  undoubtedly  performs  its  labor  at  a  much 
smaller  expense  than  the  amount  of  the  wages  of 
those  whose  labors  it  thus  supplants.  This  is,  in 
truth,  the  case  of  all  machinery." 

But  this,  he  says,  is  simply  due  to  the  fact  "  that 
the  profit  obtainable  for  the  use  of  any  machine 
must  be  regulated  by  the  universal  regulator  of 
prices,  the  relation  of  supply  and  demand."  In 
other  words,  if  every  one  is  free  to  produce  such  an 


170  VALUE  AND  DISTRIBUTION. 

engine,  its  value  cannot  exceed  its  cost  of  produc- 
tion. 

But  it  might  be  asked,  if  free  competition  presses 
down  the  value  of  the  machine,  will  it  not  also  press 
down  the  value  of  the  products  of  that  machine? 
For  as  long  as  the  machine  yields  a  profit  other 
machines  will  be  produced  and  their  products  in- 
creased until  this  profit  disappears.  The  real  ques- 
tion at  issue  is,  Why  does  this  competing  process 
cease  while  there  still  remains  that  portion  of  this 
profit  which  we  call  interest. 

85.  Malthus,  who  in  general  follows  Lauderdale 
quite  closely,  seems  at  times  to  have  recognized  this 
weakness  in  the  argument,  and  to  feel  that  in  the 
formation  of  interest  there  was  more  to  be  considered 
than  the  productivity  of  capital.  He  sees  that  com- 
petition must  always  leave  a  share  for  the  capitalist, 
or,  in  other  words,  that  profit  in  the  sense  of  interest 
is  an  essential  part  of  the  cost.  He  sees  that  over 
and  above  the  direct  sacrifice  of  labor  there  is  an- 
other form  of  sacrifice  which  is  endured  by  the  capi- 
talist, and  which  he  will  not  endure  without  compen- 
sation. In  other  words,  Malthus  goes  behind  the 
limitation  of  the  supply  of  capital  to  inquire  as  to 
the  cause  of  this  limitation.  For  he  urges  that  "  the 
gradual  diminution  in  the  rate  of  profit  must  in  the 
long  run  bring  the  power  and  the  will  to  accumu- 
late capital  to  a  stand-still."  * 

*  Principles  of  Political  Economy,  p.  303. 


THE  EARLIER  PRODUCTIVITY  THEORY  OF  INTEREST. 

But  in  his  apprehension  of  this  truth  Mai  thus  is 
not  very  persistent.  For  the  most  part  he  contents 
himself,  as  did  Lauderdale,  with  the  explanation  that 
the  rate  of  profit  was  a  question  of  supply  and  de- 
mand, and  only  on  rare  occasions  does  he  trouble 
himself  to  go  back  of  this  and  inquire  what  it  is  that 
limits  this  supply. 

86.  Ellipsis  in  the  Argument  of  the  Advocates 
of  Productivity. — It  seems,  then,  that  the  various 
attempts  to  formulate  a  productivity  theory  of  in- 
terest have  either  assumed  that  the  employment  of 
capital  necessarily  resulted  in  an  increase  in  value, 
or  have  noted  that  it  resulted  in  an  increase  in  com- 
modities, and  have  then  assumed  that  this  was  the 
same  as  an  increase  in  value.     None  of  them  have 
succeeded  in   supplying  the   ellipsis  between  these 
two  phenomena.     In  other  words,  they  have  failed 
to  show  the  creation  of  a  surplus  of  value  over  and 
above  the  amount  necessary  to  maintain  the  existing 
supply  of  capital. 

III.    INCREASE  IN  PRODUCT  IS  NOT  A  NECESSARY  CONDITION 
OF  INTEREST. 

87.  Bohm-Bawerk  fails  to  recognize  the  Cause 
of  the  Confusion. — Bohm-Bawerk's  criticism  of  the 
various  attempts  to  formulate  a  productivity  theory 
of  interest  is  in  many  respects  most  admirable.     He, 
however,  fails  to  recognize  the  ultimate  source  of  all 
their  difficulties, — the  unwarranted  assumption  that 
increase  in  product  is  a  necessary  condition  of  in- 


172  VALUE  AND  DISTRIBUTION. 

terest.  He  accents  the  physical  productivity  of  capi- 
tal so  strongly  that  it  even  seems  to  be  an  essential 
condition  of  his  own  theory  of  interest.  That  he  is 
in  error  on  this  point  we  hope  to  show  on  pages  209 
to  211.  For  the  present  we  must  content  ourselves 
with  urging  that  the  physical  productivity  of  capital, 
in  the  sense  of  an  increase  in  quantity  of  product, 
though  a  frequent  incident,  is  not  a  necessary  condi- 
tion of  the  phenomenon  of  interest.* 

*  It  will  hardly  be  necessary  to  call  attention  to  the  fact 
that  in  this  review  of  the  various  theories  of  interest  we 
have  drawn  very  freely  upon  Bohm-Bawerk's  "  Capital  and 
Interest." 


CHAPTER    V. 

THE  ABSTINENCE  THEORY  OF  INTEREST. 

BOTH  Smith  and  Mai  thus  seem  to  have  had  some 
conception  of  the  abstinence  theory  of  interest. 
Smith  writes :  "  In  all  countries  where  there  is  tol- 
erable security  every  man  of  common  understanding 
will  endeavor  to  employ  whatever  stock  he  can  com- 
mand in  procuring  either  present  enjoyment  or  future 
profit"**  Again,  Malthus  writes:  "The  gradual 
diminution  in  the  rate  of  profit  will  in  the  long  run 
bring  the  power  and  the  will  to  accumulate  capital" 
to  a  standstill.f 

88.  Senior's  Statement  of  the  Theory. — The 
above  antithesis  was  seized  upon  by  Senior  when, 
some  years  later,  he  elaborated  the  now  well-known 
"Abstinence  Theory  of  Interest."  He  writes:  "The 
conduct  of  a  person  who  either  abstains  from  the 
unproductive  use  of  what  he  can  command,  or  de- 
signedly prefers  the  production  of  the  remote  to  that 
of  the  immediate  results,"  etc.J  Senior,  however, 
does  not  include  capital  among  the  primary  factors 
of  production,  but  holds  that  it  is  a  product  of  the 
factors  labor,  natural  agents,  and  abstinence.  In 

*  Wealth  of  Nations,  Book  II.  Chap.  I. 
f  Principles  of  Political  Economy,  p.  303. 
J  Outlines  of  the  Science  of  Political  Economy,  p.  58. 

173 


174  VALUE  AND  DISTRIBUTION. 

other  words,  it  is  not  capital  but  abstinence  that  is 
the  original  factor,  since  it  stands  in  the  same  rela- 
tion to  interest  that  labor  does  to  wages. 

In  our  review  of  the  Use  Theory  of  Interest  we 

,saw  that  the  capitalist  usually  secures  not  only  the 
return  of  his  original  investment,  but  in  addition  a 
surplus  in  value,  to  which  the  term  interest  is  ap- 
plied. This  seemed,  however,  to  conflict  with  the 
contention  that  value  is  determined  by  cost.  The 
advocates  of  the  Use  Theory  endeavored  to  get  over 
this  difficulty  by  insisting  that  besides  the  sacrifice 
involved  in  the  using  up  of  capital  there  was  an 
additional  sacrifice  of  the  use  of  the  capital  during 
an  interval  of  time.  This  latter  use  of  capital, 
which  they  regarded  as  a  separate  and  distinct  sacri- 
fice from  the  using  up  of  capital,  they  equated  to  the 
surplus  in  value  or  to  interest.  The  advocates  of  the 
Abstinence  Theory  have  endeavored  to  account  for 
this  surplus  value  by  equating  it  to  the  disutility  or 
sacrifice  of  abstinence.  If  men  make  a  sacrifice  by 
postponing  present  enjoyment,  and  devote  the  re- 
sources so  spared  to  the  purposes  of  production,  it  is 

.  manifest  that  the  resulting  increase  in  product  is 
very  intimately  connected  with  the  saving  which 
made  possible  the  adoption  of  the  more  productive 
methods.  In  other  words,  the  cost  of  production 
must  include  not  only  the  labor  and  capital  that  is 
used  up  in  the  process  of  production,  but  also  the 
disutility  involved  in  the  postponement  of  present 
enjoyment,  or,  in  brief,  abstinence.  The  surplus 


THE  ABSTINENCE  THEORY  OF   INTEREST.  175 

value  that  results  from  capitalistic  methods  of  pro- 
duction is  in  this  way  equated  to  a  disutility  and  the 
law  of  cost  is  maintained  in  its  integrity.  Here,  in 
a  very  brief  way,  we  have  the  statement  of  a  theory 
that  has  provoked  the  most  violent  denunciation  on 
the  part  of  socialist  writers  and  the  less  violent  but 
equally  pronounced  opposition  of  the  Austrian  econo- 
mists ?  * 

89.  Lasalle's  Philippic. — It  wits  against  this  theory 
that  Lasalle  launched  the  oft-quoted  philippic, — 
"  The  profit  of  capital  is  the  '  wage  of  abstinence/ 
Happy,  even  priceless  expression  !  The  ascetic  mil- 
lionaires of  Europe !  Like  Indian  penitents  or  pil- 
lar saints  they  stand ;  on  one  leg,  each  on  his  column, 
with  straining  arm  and  pendulous  body  and  pallid 
looks,  holding  a  plate  towards  the  people  to  collect 
their  wages  of  abstinence.  In  their  midst,  towering 
up  above  all  his  fellows,  as  head  penitent  and  ascetic, 
the  Baron  Rothschild  !  This  is  the  condition  of  so- 
ciety !  how  could  I  ever  so  much  misunderstand  it?"f 
This  on  the  part  of  the  well-meaning  but  seldom  well- 
tempered  champion  of  the  masses  may  readily  be  par- 
doned, but  that  the  Austrian  economists  who  insist  so 
strongly  upon  the  importance  of  the  marginal  concept 
in  economic  theory  should  find  anything  to  commend 
in  this  ill-considered  tirade  is  somewhat  surprising. 

*  It  may  be  well  to  call  attention  to  the  important  part 
played  by  the  theory  of  value  in  these  discussions  of  the 
theory  of  interest. 

f  Capital  and  Interest,  p.  276. 


176  VALUE  AND  DISTRIBUTION. 

90.  Bohm-Bawerk's  Contention. — And  yet  Bohm- 
Bawerk  has  written:   "It  is  just  as  certain — and  on 
this  ground  Lasalle  is  for  the  most  part  right  as 
against  Senior — that  the  existence  and  the  height  of 
interest  by  no  means  invariably  correspond  with  the 
existence  and  height  of  a  sacrifice  of  abstinence.    In- 
terest, in  exceptional  cases,  is  received  where  there 
has  been  no  individual  sacrifice  of  abstinence.     High 
interest  is  often  got  where  the  sacrifice  of  abstinence 
is  very  trifling,  as  in  the  case  of  Lasalle's  million- 
aire, and  low  interest  is  often  got  where  the  sacrifice 
entailed  by  the  abstinence  is  very  great.     The  hardly 
saved  sovereign  which  the  domestic  servant  puts  in 
the  savings-bank  bears,  absolutely  and  relatively,  less 
interest  than  the  lightly  spared  thousands  which  the 
millionaire  puts  to  fructify  in  debenture  and  mortgage 
funds.     These   phenomena   fit  badly  into  a  theory 
which  explains  interest  quite  universally  as  a  '  wage 
of  abstinence/  and  in  the  hands  of  a  man  who  under- 
stood polemical  rhetoric  so  well  as  Lasalle  they  only 
furnished  so  many  pointed  weapons  of  attack  against 
that  theory."  * 

91.  Reply  to  Bohm-Bawerk. — It  is  manifest  that 
we  have  only  to  apply  this  same  sort  of  criticism  to 
the  utility  theory  of  value  to  show  that  it  likewise  is 
untenable.     How  can  you  say  that  value  is  deter- 
mined by  utility  when,  by  confession,  all  the  earlier 
increments  yield  a  higher  utility  than  those  consumed 

*  Capital  and  Interest,  p.  277. 


THE  ABSTINENCE  THEORY  OF   INTEREST.  177 

later  on  ?  Shall  we  not,  then,  reject  the  proposition 
that  value  depends  upon  utility?  As  a  matter  of 
fact  we  do  nothing  of  the  kind,  but  continue  to  insist 
that  value  depends  upon  marginal  utility.  So,  too, 
interest  is  not  determined  by  the  abstinence  or  lack 
of  abstinence  of  a  Rothschild,  but  by  the  abstinence 
or  disutility  endured  by  the  marginal  saver.  For  it 
is  his  sacrifice  of  present  enjoyment  that  determines 
the  creation  of  an  additional  supply  of  capital. 

92.  Another  Objection  to  the  Abstinence  Theory. 
— Bohm-Bawerk  has  still  another  objection  to  the 
abstinence  theory.  He  writes  :  "  I  consider  it  a  logi- 
cal blunder  to  represent  the  renunciation  or  post- 
ponement of  gratification,  or  abstinence,  as  a  second 
independent  sacrifice  in  addition  to  the  labor  sacri- 
ficed in  production."  ("  Capital  and  Interest,"  p. 
278.) 

"In  any  case  it  appears  to  me  obvious  that,  in 
reckoning  the  sacrifice  made  for  any  economic  end, 
the  direct  sacrifice  in  means — that  sacrifice  which  is 
first  made — and  the  indirect  sacrifice  that  takes  the 
shape  of  other  kinds  of  advantage  that  might  have 
been  obtained  in  other  circumstances  by  the  means 
sacrificed,  can  be  calculated  only  alternately  and 
never  cumulatively.  I  may  consider  the  sacrifice  of 
my  pleasure  trip  to  be  either  the  thirty  pounds  which 
it  has  directly  cost  me,  or  the  Persian  carpet  which 
it  has  indirectly  cost  me,  but  never  as  the  thirty  pounds 
and  the  carpet.  Just  in  the  same  way  our  rustic  may 

consider,  as  the  sacrifice  which  the  catching  of  three 

12 


178  VALUE  AND   DISTRIBUTION. 

fish  costs  him,  either  the  day's  work  directly  ex- 
pended, or  the  three  hares  indirectly  sacrificed  (or, 
say,  the  gratification  he  gets  from  eating  them),  but 
never  the  day's  work  and  the  gratification  obtained 
through  shooting  the  hares.  So  much,  I  think,  is 
clear."  (Page  279.) 

On  page  283  we  find  this  argument  put  in  a  little 
more  definite  form :  "  Suppose  we  feel  the  pain  of  a 
day's  labor  as  an  amount  which  may  be  indicated  by 
the  number  10.  We  actually  employ  the  day  in 
catching  three  fish,  and  these  fish  give  us  a  gratifi- 
cation expressed  by  the  number  15.  ...  What  our 
three  fish  cost  us  in  this  case  is  the  labor-pain,  indi- 
cated by  the  number  10.  .  .  . 

"  If,  on  the  other  hand,  it  is  possible,  by  laboring 
for  a  day  at  other  kinds  of  work,  to  get  a  gratifica- 
tion greater  than  the  pain  represented  by  the  num- 
ber 10,  if  we  could,  e.g.,  by  a  day's  shooting,  obtain 
three  hares  of  the  value  of  12,  then  it  is  quite  rea- 
sonable to  expect  that  we  would  not  in  any  case  re- 
main idle,  but  possibly  go  shooting  instead  of  fishing. 
What  our  fish  really  cost  us  now  is  not  the  positive 
labor-pain  expressed  by  the  number  10,  for  this  we 
should  have  undergone  at  any  rate,  but  the  negative 
loss  of  an  enjoyment  which  we  might  have  had,  indi- 
cated by  the  number  12.  But,  of  course,  we  must 
never  calculate  the  want  of  employment  and  the  pain 
of  labor  cumulatively ;  for  if  we  had  not  preferred 
catching  fish,  we  could  not  have  spared  ourselves  the 
pain  of  labor  and  yet  have  had  the  gratification  of 


THE  ABSTINENCE  THEORY  OF  INTEREST.  179 

shooting.     And  just  as  little,  if  we  choose  to  fish,  do 
we  by  that  choice  make  a  double  sacrifice."  * 

93.  Reply  to  this  Objection. — If  the  utility  which 
might  have  been  secured  by  hunting  for  hares  is  12, 
then  it  follows  that  this  12  represents  the  total  pos- 
sible sacrifice  incurred  in  securing  the  fish.  In  other 
words,  we  cannot  add  to  this  either  10,  the  pain  of 
labor,  or  any  part  thereof.  If  this  is  what  Bohm- 
Bawerk  intends  to  say,  I  am  "in  entire  agreement 
with  him.  But  when  he  writes  that  "  if  the  work  is 
reckoned  as  sacrifice,  there  cannot  be  added  to  that 
in  the  calculation  the  smallest  fragment  of  the  other 
kinds  of  enjoyment  that  were  renounced"  (page 
280),  I  am  compelled  to  part  company  with  him. 
He  seems  to  regard  this  proposition  as  the  converse 
of  the  previous  one,  in  which  he  declares  that  if  the 
sacrifice  is  estimated  in  terms  of  the  gratification 
which  might  have  been  got  through  the  work,  then 
not  the  smallest  portion  of  the  work  itself  can  be 
reckoned  in  the  sacrifice.  As  a  matter  of  fact,  they 
are  essentially  different  propositions.  For  if  the 
sacrifice  is  measured  in  terms  of  the  postponed  grati- 
fication, 12,  no  addition  is  necessary  or  possible,  but 
if  it  is  estimated  in  terms  of  the  pain  of  labor,  some 
addition  is  both  possible  and  necessary.  The  post- 
poned gratification  of  12  is  clearly  resolvable  into 
the  pain  of  labor  of  10,  and  an  additional  allowance 
of  2  for  the  gratification  which  might  have  been 

*  Capital  and  Interest,  p.  284. 


180  VALUE  AND  DISTRIBUTION. 

secured  by  hunting  for  hares.  Hence,  if  work  is 
reckoned  as  sacrifice,  we  must  add  to  the  pain  of 
labor,  10,  an  additional  amount,  2,  if  we  wish  to  know 
the  total  sacrifice. 

In  other  words,  it  is  not  a  necessary  interpretation 
of  the  abstinence  theory  to  say  that  to  the  pain  of 
labor  you  must  add  the  total  pleasure  which  would 
have  been  obtained  by  the  immediate  consumption  of 
the  capital.  What  the  abstinence  theory  does  say  is, 
that  to  the  pain  of  labor  we  must  add  such  an  amount 
as  will  induce  the  marginal  saver  or  capitalist  to 
postpone  his  enjoyment;  an  amount  that  is  much 
smaller  than  the  total  pleasure  which  might  be  de- 
rived from  the  immediate  consumption  of  the  pros- 
pective capital.  And  the  reason  that  we  must  pay 
him  something  is,  as  Bohm-Bawerk  has  so  well  shown, 
that  "  in  circumstances  otherwise  equal  men  prefer  a 
present  to  a  future  enjoyment." 

94.  Still  another  Objection  to  the  Abstinence 
Theory. — The  Austrian  economists  have  still  another 
and,  to  their  minds,  a  more  serious  objection  to  the 
abstinence  theory.  It  is  here,  indeed,  that  they  re- 
veal the  real  animus  of  their  opposition  to  this  theory. 
Bohm-Bawerk  writes :  "  The  third  fault  of  Senior's 
theory  seems  to  be  that  he  has  made  his  interest 
theory  part  of  a  theory  of  value  in  which  he  explains 
the  value  of  goods  by  their  costs."  (Page  285.) 
"  Now,  even  admitting  the  correctness  of  this  theory, 
the  '  law  of  costs'  avowedly  holds  only  as  regards  one 
class  of  goods, — those  which  can  be  reproduced  in 


THE  ABSTINENCE  THEORY  OF   INTEREST.  181 

any  quantity  at  will.  In  so  far,  then,  as  Senior 
makes  his  theory  of  interest  an  integral  part  of  a 
value  theory  which  is  merely  partial,  it  can  only  be, 
in  the  most  favorable  circumstances,  a  partial  inter- 
est theory.  It  might  explain  those  profits  which  are 
made  in  the  production  of  goods  reproduced  at  will, 
but  logically  every  other  kind  of  profit  would  escape 
it  altogether."  (Page  286.) 

In  a  later  chapter  we  shall  "endeavor  to  show  that 
the  only  part  of  the  old  complex  profit  that  can  be 
included  under  interest  is  such  as  will  arise  under 
conditions  of  free  competition,  or  that  interest  is  a 
problem  in  normal  value.  If  this  is  true,  then  the 
above  objection  to  the  abstinence  theory  falls  to  the 
ground,  for  the  only  portion  of  general  profits  which 
that  theory  is  called  upon  to  explain  is  such  as  is 
realized  under  conditions  of  free  competition. 

While  the  Austrian  economists  have  failed  to  es- 
tablish their  several  contentions  against  the  absti- 
nence theory  of  interest,  it  still  remains  true  that  any 
theory  that  takes  cognizance  of  abstinence  alone  must 
fail  to  account  in  an  entirely  satisfactory  way  for  the 
phenomena  of  interest.  For  it  matters  not  how  much 
a  commodity  may  cost,  it  cannot  have  value  unless  it 
also  serves  some  utility.  Hence  in  any  satisfactory 
theory  of  interest  abstinence  and  productivity  must 
needs  supplement  each  other,  and  to  these  must  be 
added  some  adequate  explanation  of  the  part  played 
by  time  in  the  phenomenon  of  interest.  Later  on  it 
will  be  shown  that  Bohm-Bawerk,  in  the  most  sue- 


182  VALUE  AND  DISTRIBUTION. 

cessful  attempt  that  has  yet  been  made  to  construct 
a  theory  of  interest,  has  taken  cognizance  of  all 
three  of  these  elements, — this  despite  his  formal  and 
somewhat  vehement  repudiation  of  abstinence  as  a 
factor  in  the  determination  of  interest. 


CHAPTER    VI. 

INTRODUCTION  TO  THE  EXCHANGE  THEORY  OF 
INTEREST. 

BOHM-BAWERK,  in  the  development  of  this  theory 
of  interest,  devotes  considerable  space  to  the  discus- 
sion of  certain  fundamental  ^concepts  which  he  re- 
gards as  underlying  the  exchange  theory  of  interest. 
Some  acquaintance  with  this  part  of  his  argument  is 
therefore  necessary  to  a  clear  understanding  of  his 
discussion  of  the  interest  problem.  Most  text-books 
on  economics  reduce  all  possible  manifestations  of 
utility  to  three  primary  forms, — utilities  of  place, 
form,  and  time :  utility  of  place,  as  when  ice  is  trans- 
ported from  the  rivers  of  Maine  to  Southern  towns 
and  cities ;  utility  of  form,  as  in  the  artificial  produc- 
tion of  ice ;  utility  of  time,  as  when  ice  is  cut  in  win- 
ter and  stored  until  the  following  summer.  The  only 
objection  to  this  analysis  is  that  it  does  not  recognize 
the  fact  that  the  first  and  second  of  these  utilities  are 
at  the  bottom  one  and  the  same.  Whether  we  trans- 
port the  block  of  marble  from  the  quarry  or  chisel 
off  the  unnecessary  parts  in  fashioning  it  into  a  statue, 
we  are  in  both  cases  creating  space  utilities,  so  that 
in  reality  there  are  but  two  fundamental  forms  of 
utility, — those  of  space  and  those  of  time. 

95.  Capital  is  concerned  with  Time  Utilities. — 
It  has  been  said  that  man  in  all  his  efforts  simply 

183 


184  VALUE  AND  DISTRIBUTION. 

places  things  where  the  natural  forces  may  operate 
upon  them,  and  so,  whether  he  grows  wheat  in  Da- 
kota and  transports  it  to  Liverpool,  or  hews  from  a 
block  of  marble  a  statue  that  delights  mankind  for 
centuries  to  come,  he  is  but  moving  things  or  changing 
their  space  relations.  In  his  productive  activities, 
however,  he  seeks  to  minimize  his  own  efforts  by 
availing  himself,  as  far  as  possible,  of  the  natural 
forces  around  him.  In  doing  so  he  is  compelled  to 
adopt  capitalistic  or  roundabout  methods  of  produc- 
tion. Here,  as  elsewhere,  he  can  only  gain  power 
by  a  sacrifice  of  time,  for  it  is  a  fact  of  every-day  ex- 
perience that  the  operations  of  these  natural  forces 
involves  an  appreciable  interval  of  time.  From  this 
we  are  led  to  conclude,  a  priori,  that  while  labor  may 
have  to  deal  primarily  with  space  utilities,  capital  is 
in  some  way  necessary  to  the  securing  of  the  time 
utilities,  and  hence  that  interest  per  se  is  a  payment 
for  such  time  utilities.* 

Take  the  German  forests,  for  instance,  which  were 
largely  planted  by  man.  The  care  or  labor  of  man 
is  here  but  an  insignificant  element  in  the  growing 
value  of  the  tree.  In  a  qualified  way  it  might  be 

*  I  have  here  followed  the  usual  treatment  of  this  part  of 
the  subject,  and  have  assumed  that  the  expenditure  of  labor 
force  does  not  require  an  appreciable  interval  of  time.  In 
the  discussion  of  the  Normal  Yalue  Theory  of  Wages,  page 
290,  it  will  be  shown  that  this  assumption  is  not  true.  The 
recognition  of  this  fact  necessarily  results  in  a  serious  modifi- 
cation of  the  theory  of  wages. 


INTRODUCTION   TO  THE   EXCHANGE  THEORY.          185 

said  that  man's  labor  was  confined  to  placing  the 
acorn  in  the  ground  under  conditions  favorable  to  its 
growth.  For  the  rest,  it  must  largely  be  credited  to 
nature  herself.  Yet  this  growing  tree  and  its  conse- 
quent increase  in  value  is  just  as  truly  capitalistic 
production  as  the  manufacture  of  watches.  The 
former  instance,  however,  serves  to  bring  out  a  little 
more  clearly  the  fact  that  time  is  necessary  if  we  are 
to  avail  ourselves  of  the  natural  forces  that  year  after 
year  add  to  the  bulk  and  value  of  the  tree. 

Again,  let  us  take  the  case  of  the  wine  that  in- 
creases in  value  with  the  passing  years.  So  far  as 
labor  is  concerned,  the  productive  operation  is  prac- 
tically completed  with  the  storing  of  the  wine ;  yet 
as  the  years  go  by  the  forces  of  nature  are  oper- 
ating upon  this  wine,  making  changes  so  subtle  that 
chemical  analysis  can  take  no  cognizance  of  them, 
but  which  the  connoisseur  recognizes,  and  for  which 
he  is  willing  to  pay.  Here,  too,  it  is  clear  that 
while  it  is  the  free  forces  of  nature  that  bring  about 
this  change,  these  forces  do  not  work  instantaneously. 
In  other  words,  time  is  a  necessary  condition  in  the 
creation  of  this  surplus  value. 

Nor  is  there  any  difficulty  in  seeing  that  the  same 
condition  exists  in  manufacturing  processes ;  though 
there  is  a  seeming  complication,  due  to  the  facts,  first, 
that  the  interval  of  time  is  frequently  shorter,  and 
second,  that  labor  and  nature  are  here  contempora- 
neous in  their  operation.  Yet,  after  all,  the  most 
complex  machine  is  but  a  combination  of  levers,  and 


186  VALUE  AND  DISTRIBUTION. 

in  every  lever  we  only  gain  power  by  a  sacrifice  of 
time. 

96.  The  Rationale  of  Machine  Methods  of  Pro- 
duction.— It  has  just  been  shown  that  in  the  case 
of  complex  machines,  as  of  the  more  simple  tools, 
power  is  gained  by  a  sacrifice  of  time.     A  brief  in- 
quiry as  to  the  rationale  of  this  machine  method  of 
production  may  help  to  still  further  clarify  our  ideas 
on  this  point.     In  the  direct  removal  of  rocks,  etc., 
the  necessary  forces  are  much  less  easily  controlled 
by  man  than  are  the  forces  necessary  to  the  fash- 
ioning of  the  hammer  and  wedge.      Again,  just  as 
the  hammer  and  wedge  were  used   in  the  struggle 
with  the  rock  and  similar  impediments,  so  in  the 
making  of  the  hammer  and  wedge  other  tools  are 
used  more  primitive  still,  it  may  be,  but  at  least 
more  easily  manipulated,  while  in  the  production  of 
these  remote  tools  others  are  employed  that  are  still 
more  easily  manipulated.    In  other  words,  every  suc- 
cessful roundabout  method  of  production  involves  the 
carrying  back  of  the  production  process  to  forces  of 
nature  that  are  more  and  more  readily  controlled ;  at 
every  step  powers  are  invoked  that  are  stronger  and 
more  cunning  than  the  human  hand ;  this  means  that 
there  is  a  constant  shifting  of  the  burden  of  produc- 
tion from  the  costly  labor  of  man  to  the  harnessed 
powers  of  nature. 

97.  Machine  Production  not  a  Necessary   Con- 
dition of  Interest. — The  employment  of  a  machine 
or  tool,  however,  is  not  a  necessary  condition  of  in^ 


INTRODUCTION  TO  THE  EXCHANGE  THEORY.          187 

terest ;  thus  in  the  case  of  the  German  forests,  this 
phase  of  the  phenomena  is  almost  entirely  elimi- 
nated ;  and  again  in  the  case  of  aging  wine  and 
bleaching  linen,  the  machine  and  tool  play  an  in- 
significant part,  though  in  the  case  of  wine  the 
storage  vaults  clearly  take  their  place.  From  this 
it  follows  that  wherever  man  and  nature  have  co- 
operated in  the  production  of  a  commodity  which 
requires  an  appreciable  interval  of  time  to  fully 
mature  its  value,  the  phenomenon  of  interest  exists ; 
and  hence  that  under  the  term  Capital  must  be  in- 
cluded not  only  tools,  machines,  or  plant  in  gen- 
eral, but  also  all  intermediate  products.  It  would 
seem  from  this  that  economists  should  have  little 
difficulty  in  determining  just  what  is  meant  by  capi- 
tal ;  and  yet  there  is  probably  no  term  whose  defini- 
tion has  given  rise  to  more  serious  discussion. 

98.  The  Definition  of  Capital. — We  have  already 
seen  that  in  early  times  where  loans  were  made  rather 
for  purposes  of  consumption  than  of  production,  the 
word  capital  came  to  signify  the  money  loaned.  Later 
on,  Hume  maintained  that  interest  depends  not  on 
the  supply  of  money  but  upon  the  stock  of  wealth 
of  the  community.  Turgot  made  a  still  further  ad- 
vance and  defined  capital  as  the  goods  saved  from 
consumption.  But  this,  since  it  still  included  all 
wealth,  was  manifestly  too  broad  a  definition.  Adam 
Smith  took  the  next  step,  and  distinguished  capital 
from  consumption  goods  or  from  wealth  as  a  whole 
by  saying  that  "  capital  includes  the  saved  stocks," 


188  VALUE  AND   DISTRIBUTION. 

meaning  by  stocks  those  goods  that  are  dedicated  to 
production.  He  also  saw  quite  clearly  the  difference 
between  private  and  social  capital,  or  that  the  sum 
of  all  the  private  capital  might  exceed  the  total  social 
capital,  since  the  former  included  claims  upon  the 
members  of  society,  while  the  latter  only  included 
means  of  production. 

Looked  upon  as  a  source  of  income,  private  capital 
is  the  more  general,  and  was  indeed  the  original  con- 
cept. For  the  purposes  of  the  economist,  however, 
social  capital  is  the  all-important  phenomenon,  and 
it  is  largely  to  this  that  economists  have  sought  to 
confine  the  term,  and  so  have  defined  capital  either 
with  Adam  Smith  as  "  the  produced  means  of  pro- 
duction," or  with  Bohm-Bawerk  as  "  the  sum  of  in- 
termediate products." 

99.  Difficulties  encountered  by  this  Definition. — 
Clear  and  succinct  as  these  definitions  appear  to  be, 
the  moment  we  attempt  to  apply  them  considerable 
differences  of  opinion  arise.  Without  entering  into 
this  discussion  in  any  detailed  way,  it  may  be  said 
that  these  differences  are  due  to  the  difficulty  en- 
countered when  we  attempt  sharply  to  distinguish 
between  production  and  consumption  goods.  This, 
of  course,  is  the  difficulty  that  confronts  all  attempts 
at  exact  definition  where  we  have  to  deal  with  such 
fluent  phenomena.  We  know  in  a  general  way  the 
difference  between  animal  and  vegetable  life,  yet  who 
has  succeeded  in  constructing  definitions  for  these 
terms  that  will  sharply  distinguish  between  the  lower 


INTRODUCTION  TO  THE  EXCHANGE  THEORY.         189 

forms  of  animal  and  the  higher  forms  of  vegetable 
life,  or,  again,  between  life  and  non-life?  In  much 
the  same  way  the  phenomena  of  production  and  con- 
sumption are  continuous,  at  least  so  far  as  the  pro- 
ducing laborer  is  concerned.  His  consumption  of 
food  is,  after  all,  but  a  point  in  the  never-ending  circle 
of  production,  and  so  from  one  point  of  view  his  food 
is  a  consumption  good,  while  from  another  it  is  cer- 
tainly a  produced  means  of  production.  And  so  we 
find  that  while  Jevons  includes  all  capital  under  con- 
sumption goods,  Bohm-Bawerk  would  limit  the  latter 
to  goods  in  the  hands  of  the  consumer.  For  he 
writes  :  "  Finished  consumption  goods  in  the  hands  of 
producers  and  merchants  as  (warehouse)  stock  should 
be  regarded  as  capital,"  or  productive  goods,  but  the 
same  goods  in  the  hands  of  the  consumer  are  con- 
sumption goods  and  not  capital.  If  we  must  draw  an 
arbitrary  line,  this  may  be  as  good  a  point  as  any  at 
which  to  draw  it.  Yet  it  would  be  difficult  to  show 
that  the  roundabout  or  capitalistic  method  of  pro- 
duction stops  at  this  point.  Without  dwelling  upon 
the  fact  that  delivery  to  consumers  is  part  of  the  pro- 
duction process,  it  might  be  urged  that  goods  may 
actually  be  delivered  to  the  consumers  long  before 
the  production  process  ceases.  Bohm-Bawerk  on 
more  than  one  occasion  refers  to  wine  improving  in 
quality  and  increasing  in  value  with  age,  and  indeed 
makes  the  explanation  of  this  phenomenon  the  test 
to  which  all  interest  theories  should  be  subjected. 
That  this  improvement  in  quality  and  increase  in 


190  YALUE  AND  DISTRIBUTION. 

value  frequently  takes  place  in  the  cellar  of  the  con- 
sumer cannot,  of  course,  be  denied.  And  yet  when 
this  writer  holds  that  "  finished  consumption  goods  in 
the  hands  of  producers  and  merchants  as  (warehouse) 
stock  should  be  regarded  as  capital,"  he,  by  implica- 
tion, excludes  such  goods  from  this  category  if  they 
are  in  the  possession  of  the  consumers. 

From  this  we  are  led  to  conclude  that  while  for 
convenience  it  may  be  well  to  draw  the  line  between 
production  and  consumption,  between  capital  and 
non-capital  goods,  at  the  point  of  delivery  to  con- 
sumers, yet  this,  after  all,  is  but  a  conventional  dis- 
tinction. As  long  as  goods  are  increasing  in  value, 
or  rather  as  long  as  the  lapse  of  time  is  a  necessary 
condition  to  the  realization  of  their  full  value,  they 
are  part  of  the  world's  capital  stock  whether  in  the 
hands  of  producer  or  consumer.  It  would  seem, 
therefore,  that  we  must  not  insist  on  too  great  pre- 
cision when  we  come  to  apply  our  definition  of  capi- 
tal to  the  concrete  phenomena. 


CHAPTER    VII. 

THE  EXCHANGE  THEORY  OP  INTEREST. 

THE  Exchange  Theory  of  Interest  rests  upon  the 
familiar  experience  that  men  generally  prefer  a  pres- 
ent to  a  future  enjoyment.  This  finds  statement  in 
the  proposition  that  present  goods  are,  as  a  rule, 
worth  more  than  future  goods.^.  From  this  it  results 
that  he  who  exchanges  present  for  future  goods  will 
demand  some  agio,  some  surplus  in  value,  or,  in 
brief,  interest. 

It  has  just  been  shown  that  all  production  goods 
are  part  of  capital,  and  that  they  cease  to  be  capital 
the  moment  they  have  fully  matured  their  value  as 
consumption  goods.  From  this  it  may  readily  be 
inferred  that  interest  must  in  some  way  be  equated 
to  that  difference  in  value  between  production  and 
consumption  goods  which  emerges  with  the  lapse  of 
time ;  or  again,  in  Bohm-Bawerk's  terms,  interest  is 
the  difference  in  value  between  present  and  future 
goods. 

The  terms  present  and  future  goods  are  some- 
what unfortunate.  Not  the  least  of  the  difficulties 
in  which  these  terms  involve  us  is  the  fact  that  under 
this  classification  "goods  of  remoter  rank  (produc- 
tion goods),  although  materially  present  commodities, 
are,  economically,  future  commodities"  according  to 
Bohm-Bawerk's  use  of  terms.  Nor  does  any  neces- 

191 


192  VALUE  AND  DISTRIBUTION. 

sity  exist  for  confounding  the  discussion  by  intro- 
ducing new  terms  when  the  terms  production  and 
consumption  goods  are  entirely  satisfactory  for  the 
purposes  of  the  discussion.  But  as  serious  objections 
will  hereafter  be  taken  to  parts  of  the  argument  by 
which  Bohm-Bawerk  would  maintain  his  Exchange 
Theory  of  Interest,  it  will  be  necessary  to  follow  him 
in  the  use  of  the  terms  present  and  future  goods. 
The  reader  may  avoid  some  of  the  confusion  by  al- 
ways thinking  of  present  goods  as  consumption  goods 
and  of  future  goods  as  production  goods. 

I.    PRESENT  GOODS  ARE  WORTH  MORE  THAN  FUTURE  GOODS. 

"  The  very  centre  and  kernel"  of  Bohm-Bawerk's 
theory  of  interest  is  the  proposition  that  "present 
goods  are,  as  a  rule,  worth  more  than  future  goods 
of  like  kind  .and  number."  It  will  be  shown  here- 
after that  this  proposition  is  not  of  such  generality 
as  this  writer  would  have  us  believe.  It  is  suffi- 
ciently general,  however,  for  the  purposes  of  his 
theory  interest ;  and  our  present  task  will  be  to  in- 
quire why  it  is  true,  or  how  it  is  that  men  have  come 
to  value  present  goods  more  highly  than  future 
goods. 

100.  Differences  in  Provision  and  Underestimate 
of  the  Future. — The  productivity  of  capital  is  not, 
according  to  Bohm-Bawerk,  the  only  cause  of  the 
higher  valuation  of  present  goods.  In  his  analysis 
of  the  phenomena  he  finds  two  other  sources  of  the 
higher  valuation  of  present  goods.  One  is  the  fact 


THE  EXCHANGE  THEORY  OF  INTEREST.  193 

that  many  men  are  less  efficiently  provided  for  in 
the  present  than  they  hope  to  be  in  the  future ;  for 
this  reason  the  marginal  utility  of  present  goods  is 
relatively  high.  Again,  even  though  the  actual  mar- 
ginal utilities  of  present  and  future  goods  were  the 
same,  yet  there  is  a  tendency  of  mankind  to  under- 
rate or  discount  anything  in  the  future,  due  to  the 
lack  of  vividness  in  our  mental  pictures  of  future 
phenomena;  the  present  good,  therefore,  receives  a 
higher  valuation  than  is  enjoyed  by  the  future  good 
at  the  present  time.  These  two  causes  Bohm-Bawerk 
finds  to  be  cumulative  in  their  effect. 

101.  Roundabout  Methods  of  Production. — It  is  a 
fact  of  common  experience  that  roundabout  methods 
of  production  are  generally  more  profitable  than  di- 
rect methods.     It  is  not,  of  course,  denied  that  ma- 
chines and  processes  frequently  fail  because  they  are 
too  complicated  or  too  roundabout  in  their  mode  of 
operation.      Here,  as  elsewhere,  the  law  of  dimin- 
ishing returns  may  be  called  into  play.     Yet  it  still 
remains  true  that  capitalistic  or  roundabout  methods 
are  in  general  adopted,  and  this  because,  on  the  whole, 
they  yield  a  greater  return. 

102.  Technical  Superiority  of  Present  Goods. — It 
follows  from  what  has  just  been  said  that  if  I  have 
goods  now  in  hand  I  can  employ  them  in  productive 
processes,  and  so  secure  that  surplus  which  results 
from  roundabout  methods  of  production.     In  other 
words,  present  goods  are  more  highly  valued  because 
of  this  productivity  of  capital.     It  was  seen  in  the 

13 


194  VALUE  AND  DISTRIBUTION. 

discussion  of  the  Productivity  Theory  of  Interest 
that  an  increase  in  product  is  not  necessarily  an  in- 
crease in  value.  Bohm-Bawerk  endeavors,  by  a  some- 
what elaborate  argument,  to  bridge  this  chasm ;  his 
success  is,  however,  somewhat  doubtful.  He  attempts 
to  prove  too  much,  to  establish  a  general  proposition 
when  for  the  purposes  of  his  theory  the  establishing 
of  any  such  general  proposition  is  entirely  unneces- 
sary. For  the  present,  however,  we  will  assume  that 
his  thesis  is  in  a  large  measure  true,  sufficiently  so,  at 
least,  for  the  purposes  of  his  theory  of  interest.  It 
should  also  be  noted  that,  while  he  recognizes  that  the 
first  two  causes  (Difference  in  Provision  and  Under- 
estimate of  the  Future)  are  cumulative  in  their  effect, 
he  holds  that  this  last  cause  (Technical  Superiority) 
is  alternate  with  them. 

To  sum  up,  interest  is  the  difference  in  value  be- 
tween present  and  future  goods.  The  superior  value 
of  present  goods  is  due,  on  the  one  hand,  to  the  differ- 
ence in  provision  between  present  and  future  and 
the  tendency  of  mankind  to  underestimate  all  future 
phenomena ;  on  the  other,  to  the  productivity  of 
capital.  This  in  a  very  brief  way  is  the  Exchange 
Theory  of  Interest  which  Bohm-Bawerk  has  so  ably 
developed. 


CHAPTER    VIII. 

CRITICISM   OP    THE    EXCHANGE   THEORY   OF    IN- 
TEREST. 

I.    ARE  PRESENT  GOODS  WORTH  MORE  THAN  FUTURE  GOODS? 

"  PRESENT  goods/'  writes  Bohm-Bawerk,  "  are,  as 
a  rule,  worth  more  than  future  goods  of  like  kind 
and  number.  This  proposition  is  the  kernel  and 
centre  of  the  interest  theory  which  I  have  to  present. 
All  the  lines  of  explanation,  by  which  I  hope  to 
elucidate  the  phenomena  of  interest,  run  through 
this  fact ;  and  round  it,  both  essentially  and  super- 
ficially, is  grouped  the  whole  of  the  theoretical  work 
we  have  to  do."*  While  the  important  bearing  of 
this  proposition  upon  the  theory  of  interest  will  not 
be  called  in  question  in  the  present  chapter,  yet  an 
endeavor  will  be  made  to  show  that  the  proposition 
is  by  no  means  of  such  generality  as  Bohm-Bawerk 
would  lead  us  to  suppose. 

103.  Admitted  Exceptions  to  this  Contention. — 
In  this  same  connection  Bohm-Bawerk  writes :  "  The 
only  exception  occurs  in  those  comparatively  rare 
cases  where  it  is  difficult  or  impracticable  to  keep  the 
present  goods  till  a  time  of  worse  provision  comes. 
This  happens,  for  instance,  in  the  case  of  goods  sub- 
ject to  rapid  deterioration  or  decay,  such  as  ice,  fruit, 

*  Positive  Theory  of  Capital,  p.  237. 

195 


196  VALUE  AND  DISTRIBUTION. 

and  the  like."  (Page  251.)  Again,  on  page  297,  he 
writes  :  "  Lastly,  it  very  seldom  occurs,  and  then  never 
as  regards  present  and  future  goods  in  general,  but 
only  as  regards  one  particular  kind  of  goods,  that  the 
relations  of  supply  and  demand  are  such  that  future 
goods  obtain  a  higher  price  than  present  goods  of 
the  same  kind,  and  that  a  premium  in  present  goods 
must  be  paid  for  future  goods.  It  will  only  hap- 
pen in  cases  where,  presumably,  the  relations  of  sup- 
ply and  demand  in  the  future  will  be  essentially 
more  unfavorable  than  in  the  present,  and  where,  at 
the  same  time,  for  personal  or  technical  reasons,  it  is 
not  possible  to  preserve  the  present  ample  stock  till 
that  future  point  of  time  when  they  are  assured  of  a 
higher  value.  Suppose  the  case  of  a  brewer  whose 
ice-cellars  are  too  small  for  his  requirements.  If  in 
January  he  puts  in  as  much  ice  as  the  cellars  will 
hold  and  has  still  two  hundred  carts  of  ice  over,  he 
may  be  very  willing  to  exchange  these  for  two  hun- 
dred carts  of  ice  deliverable  in  August."  In  a  foot- 
note he  adds  :  "  Similar  cases  may  perhaps  occur  after 
very  abundant  harvests,  where  the  producers  have 
not  enough  storage  accommodation  to  secure  the  sur- 
plus." (Page  297.) 

104.  Additional  Exceptions. — Now,  I  would  urge 
that  those  instances  in  which  "  a  premium  in  present 
goods  must  be  paid  for  future  goods"  are  by  no  means 
so  rare  as  this  writer  would  have  us  believe.  The  fact  is 
brought  out  quite  clearly  in  the  following  tables,  which 
were  taken  without  expurgation  from  a  daily  paper. 


CRITICISM  OF  THE  EXCHANGE  THEORY  OF  INTEREST.    197 

They  are  given  at  intervals  of  three  months,  and  so 
display  the  course  of  prices  during  the  entire  year. 


JANUARY  2. 

APRIL  2. 

JULY  2. 

OCTOBER  2. 

Wheat  No.  2. 

Wheat  No.  2. 

Wheat  No.  2. 

Wheat  No.  2. 

Jan.      .80 

April,  .69| 

July,     .54f 

Dec.     .90f 

May,    .83| 

May,    .70f 

Sept.    .56! 

May,    .89! 

July,    .79| 

July,    .69f 

Dec.     .58 

Sept.    .67f 

Corn  No.  2. 

Corn  No.  2. 

Corn  No.  2. 

Corn  No.  2. 

Jan.,     .23! 

April,   .24f 

Jufy,    .26| 

Oct.      .27f 

July,    .26f 

July,    .26 

Sept.    .27f 

Dec.     .29| 

Sept.    .27-J 

May,    .29J 

May,     .32} 

Oats  No.  2. 

Oats  No.  2. 

Oats  No.  2. 

Oats  No.  2. 

Jan.      .16f 

May,    .17J 

July,  .15| 

Oct.      .19! 

May,     .19| 

July,     .18| 

Sept.    .15J 

Dec.     .19J 

• 

Sept.     .18f 

May,     .18! 

May,    .22f 

Mess  Pork. 

Mess  Pork. 

Mess  Pork. 

Mess  Pork. 

Jan.    7.47| 

May,  8.60 

July,  6.85 

Oct.    8.20 

May,  7.80 

July,  8.67^ 

Sept.  7.02! 

Dec.   8.32! 

Jan.    9.17! 

Lard. 

Lard. 

Lard. 

Lard. 

Jan.    3.77J 

May,  4.22! 

July,  3.87! 

Oct.    4.50 

May,  3.95 

July,  4.32£ 

Sept.  3.97! 

Dec.   4.60 

Jan.    4.72! 

SJwrt  Ribs. 

Short  Bibs. 

Short  Ribs. 

Short  Ribs. 

Jan.    3.75 

May,  4.65 

July,  3.65 

Oct.    4.95  ' 

May,  3.95 

July,  4.67! 

Sept.  3.77! 

Dec.   4.80 

Jan.    4.77! 

Under  the  quotations  of  January  2,  we  find  that 
wheat  purchased  on  that  date  for  January  delivery 
is  worth  only  80  cents  per  bushel,  while  wheat  pur- 


198  VALUE  AND  DISTRIBUTION. 

chased  on  the  same  date  for  May  delivery  is  worth 
831  cents  per  bushel.  Corn  purchased  in  January 
for  January  delivery  is  worth  only  23s  cents,  while 
corn  purchased  on  the  same  date  for  July  delivery 
is  worth  261  cents,  etc.  In  other  words,  in  direct 
opposition  to  the  contention  that  "  present  goods  are, 
as  a  rule,  worth  more  than  future  goods,"  we  find 
that  the  quotations  for  future  delivery  are  here  in 
excess  of  the  quotations  for  present  delivery  in  every 
instance  save  those  of  wheat  and  short  ribs  in  the 
October  list. 

105.  These  Exceptions  are  not  fatal  to  the  Ex- 
change Theory  of  Interest. — Primarily,  we  have  here 
a  case  of  what  Bohm-Bawerk  has  styled  "  Substitu- 
tionary  Utility."  With  our  price-list  in  mind,  let  us 
take  the  case  of  a  grain  speculator.  From  the  best 
information  he  can  get  he  concludes  that  the  price  of 
wheat  in  the  coming  May  will  be  eighty  cents.  This, 
despite  the  fact  that  its  present  value  is  only  seventy 
cents.  Under  these  circumstances  he  decides  to  buy 
wheat  now  and  sell  it  next  May,  when,  as  he  hopes, 
the  price  will  have  advanced  to  eighty  cents. 

The  question  arises,  What  price  will  he  now  pay 
for  wheat  to  be  delivered  to  him  or  his  assigns  in  May 
next  ?  We  answer,  that  he  will  pay,  and  will  only 
pay  the  price  of  wheat  for  present  delivery,  or  seventy 
cents  plus  the  cost  of  carrying  said  wheat  over  to  that 
future  date.  More  than  this  he  will  not  pay,  since 
he  can  insure  the  future  delivery  by  buying  it  now 
and  storing  it  until  May  comes  around.  In  other 


CRITICISM   OF  THE  EXCHANGE  THEORY  OF   INTEREST.     199 

words,  the  present  value  of  wheat  for  a  May  delivery 
is  a  substitutionary  value,  made  up  of  the  price  of 
wheat  for  present  delivery  plus  the  cost  of  carrying 
that  wheat  until  the  date  of  the  future  delivery. 

Such  a  price-list  is,  of  course,  fatal  to  the  general 
contention  that  present  goods  are,  as  a  rule,  worth 
more  than  future  goods.  Again,  if  this  proposition 
is,  as  Bohm-Bawerk  declares,  the  centre  and  kernel 
of  the  Exchange  Theory  of  Interest,  the  above  price- 
list  would  seem  seriously  to  invalidate  that  theory. 
As  a  matter  of  fact,  the  theory  stands,  despite  any 
such  list,  because  that  theory  does  not  depend  upon 
the  establishing  of  the  superiority  of  the  present 
goods  as  a  universal  or  even  as  a  general  proposition. 

For  while  it  frequently  happens  that  "  the  relations 
of  supply  and  demand  in  the  future  will  be  essentially 
more  unfavorable  than  in  the  present,"  yet  it  hap- 
pens even  more  frequently  that  this  condition  is  re- 
versed, in  which  case,  of  course,  present  goods  will  be 
more  highly  valued  than  future  goods.  Now,  all  that 
is  necessary  for  a  theory  of  interest  is  that  this  last 
condition  shall  be  realized  with  sufficient  frequency 
to  furnish  profitable  employment  for  the  available 
supply  of  capital  in  increasing  the  future  supply  of 
these  present  goods.  As  the  supply  of  capital  finds 
very  positive  limitations  in  the  abstinence  endured 
by  the  marginal  saver,  it  is  manifest  that  interest 
may  arise,  though  the  cases  in  which  future  goods  are 
worth  more  than  present  goods  are  of  frequent  occur- 
rence in  our  economic  experience. 


200  VALUE  AND  DISTRIBUTION. 

II.  ABSTINENCE  IN  THE  EXCHANGE  THEORY  OF  INTEREST. 

In  the  review  of  the  Exchange  Theory  of  Interest 
it  was  stated  that,  according  to  Bohm-Bawerk,  there 
are  three  influences  that  tend  to  make  present  goods 
worth  more  than  future  goods.  These  are :  difference 
in  provision,  underestimate  of  the  future,  and  the 
technical  superiority  of  present  goods.  In  the  re- 
view of  the  Abstinence  Theory  it  was  shown  how 
strenuously  Bohm-Bawerk  had  insisted  upon  the 
elimination  of  abstinence  as  a  factor  in  the  deter- 
mination of  interest;  this,  too,  on  the  ground  that 
"high  interest"  is  often . got  where  the  sacrifice  of 
abstinence  is  very  trifling."  * 

106.  Interest  measured  by  Marginal  Abstinence. — 
In  reply  to  this  last  contention  it  was  urged  that 
here,  as  elsewhere,  it  is  the  marginal  that  is  the  de- 
terminant,— in  the  case  under  consideration,  the  ab- 
stinence or  disutility  endured  by  the  marginal  saver 
or  capitalist.    Nor  does  any  elaborate  argument  seem 
necessary  to  show  that,  despite  his  formal  repudiation 
of  abstinence,  Bohm-Bawerk   has  in  reality  taken 
cognizance  of  it  in  the  first  two  of  the  above-named 
factors  that  tend  to  make  present  goods  more  highly 
valued  than  future  goods. 

107.  Abstinence    recognized    in    the    Exchange 
Theory. — (a)  DIFFERENCE  IN  PROVISION. — With  re- 
gard to  the  first  factor,  it  is  manifest  that  the  supply 

*  Capital  and  Interest,  p.  297. 


CRITICISM  OF  THE  EXCHANGE  THEORY  OF  INTEREST.     201 

of  goods  is  increased  by  capitalistic  methods  of  pro- 
duction. The  adoption  of  these  roundabout  or  more 
productive  methods  is  again  dependent  upon  the  sup- 
ply of  capital,  and  this  in  last  resort  upon  the  ab- 
stinence of  the  marginal  saver.  Or  to  put  it  in  a 
different  way, — if  the  supply  of  present  goods  was 
practically  unlimited  no  disutility  or  abstinence 
would  be  involved  in  the  postponement  of  the  con- 
sumption of  a  part  of  such  goods.  In  other  words, 
it  is  because  the  supply  of  present  goods  is,  for  many 
people,  very  inadequate  that  abstinence  from  con- 
sumption is  a  disutility  which  men  will  not  endure 
without  the  expectation  of  a  greater  return  in  the 
future. 

(b)  UNDERESTIMATE  OF  THE  FUTURE. — Again,  as 
Bohm-Bawerk  has  clearly  shown,  the  effect  of  the 
second  factor,  "  underestimate  of  the  future,"  is 
cumulative  with  the  first.  The  discounting  of  the 
future  good  has  the  same  effect  as  increasing  the 
"  difference  in  provision."  In  other  words,  the  re- 
ward of  abstinence  is  discounted  by  our  underesti- 
mate of  the  future.  From  this  it  follows  that  the 
abstinence  or  disutility  which  the  marginal  saver  will 
endure,  in  the  hope  of  securing  that  reward,  must 
suffer  a  like  diminution.  As  a  result,  the  process  of 
saving  ceases  earlier,  the  supply  of  capital  decreases, 
the  more  productive  methods  are  abandoned,  and  in 
last  resort  the  supply  of  present  goods  is  decreased. 
This  process  is  continued  until  the  difference  in 
value  between  present  and  future  goods  is  again 


202  VALUE  AND  DISTRIBUTION. 

equated  to  the  abstinence  or  disutility  endured  by 
the  marginal  saver.  * 

And  so,  despite  Bohm-Bawerk's  practical  repudia- 
tion of  abstinence  in  the  earlier  part  of  his  work 
and  his  failure  to  take  any  formal  cognizance  of  it 
in  the  final  statement  of  his  theory  of  interest,  yet, 
as  a  matter  of  fact,  he  actually  includes  it  in  that 
statement,  though  under  other  and  more  cumber- 
some terms.  That  some  recognition  of  the  part 
played  by  abstinence  is  necessary  to  any  complete 
solution  of  the  interest  problem  will  be  made  clear 
in  the  next  chapter. 

III.    IS  THE  TECHNICAL  SUPERIORITY  OF  PRESENT  GOODS  A 
NECESSARY  CONDITION  OF  INTEREST? 

108.  Technical  Superiority  an  Increase  in  Quan- 
tity of  Product. — According  to  Bohm-Bawerk,  the 
third  and  last  factor  which  tends  to  make  present 
goods  worth  more  than  future  goods  is  the  "  technical 
superiority  of  present  goods." 

*  In  one  instance,  though  only  in  a  foot-note,  BOhm-Bawerk 
recognizes  that  he  is  here  dealing  with  the  disutility  of  saving 
(abstinence).  In  this  note  he  writes  :  "  Indirectly  this  effect 
will  be  strengthened  by  the  fact  that,  through  the  under- 
valuation of  the  future  utility,  men  will  refrain  from  pro- 
viding for  the  future  so  amply  as  they  otherwise  would  have 
done.  In  other  words,  this  underestimate  acts  to  the  preju- 
dice of  saving  and  accumulation  of  wealth  and  still  further 
reduces  the  number  of  persons  who  have  to  throw  an  accumu- 
lated surplus  of  present  goods  on  the  market."  ("Positive 
Theory  of  Capital,"  p.  259.) 


CRITICISM  OF  THE  EXCHANGE  THEORY  OF  INTEREST.    203 

Just  what  is  meant  by  this  is  revealed  in  the  fol- 
lowing passage  :  "  It  is  an  elementary  fact  of  experi- 
ence that  methods  of  production  which  take  time  are 
more  productive.  That  is  to  say,  given  the  same 
quantity  of  productive  instruments,  the  lengthier  the 
productive  method  employed  the  greater  the  quantity 
of  products  that  can  be  obtained." 

From  this  it  is  clear  that  the  technical  superiority 
which  this  writer  has  in  mind  is  an  increase  in  the 
quantity  of  products,  and  the  task  that  he  has  set  for 
himself  is  to  show  that  this  increase  in  the  quantity 
of  products  necessarily  results  in  an  increase  in  value. 
In  other  words,  he  devotes  the  entire  chapter  on  the 
technical  superiority  of  present  goods  to  an  endeavor 
to  supply  that  ellipsis  between  the  increase  in  product 
and  the  increase  in  value  which  proved  so  fatal  to 
the  earlier  productivity  theories.  ("  Positive  Theory 
of  Capital/'  p.  260.)  Again,  he  writes:  "The  state- 
ment of  how  the  productivity  of  capital  works  into 
and  together  with  the  other  two  grounds  of  the 
higher  valuation  of  present  goods  I  consider  one  of 
the  most  difficult  points  in  the  theory  of  interest, 
and,  at  the  same  time,  the  one  which  decides  the 
fate  of  that  theory."  (Page  277,  foot-note.) 

109.  Defects  in  Bohm-Bawerk's  Reasoning. — As 
against  this  I  would  urge,  first,  that  the  technical 
superiority  of  present  goods  is  not  an  "  independent 
cause  of  the  higher  valuation  of  present  goods ;" 
secondly,  that  the  technical  superiority  of  present 
goods  does  not  necessarily  result  in  an  increase  in 


204  VALUE  AND   DISTRIBUTION. 

value,  and  thirdly,  that  the  technical  superiority  of 
present  goods  is  not  an  essential  condition  of  interest. 

(a)  TECHNICAL  SUPERIORITY  NOT  AN  INDEPEN- 
DENT CAUSE  OF  VALUE. — Bohm-Bawerk  writes  : 
"  Thus  we  get  as  a  result  of  our  digression  the  assured 
conviction  of  two  things :  first,  that  the  productive 
superiority  of  present  goods  assures  them  not  only 
a  surplus  in  product,  but  a  surplus  in  value;  and, 
second,  that  in  this  superiority  we  have  to  deal  with 
a  third  cause  of  the  surplus  value,  and  one  that  is 
independent  of  any  of  the  two  already  mentioned."* 

In  criticising  this  statement  some  inquiry  is  first 
necessary  as  to  the  sense  in  which  Bohm-Bawerk 
employs  the  term  "  independent."  He  writes :  f 
"  About  the  first  two  factors  we  know  already :  their 
effects  are  cumulative.  ...  It  is  essentially  differ- 
ent with  the  co-operation  of  the  third  factor.  True, 
it  also  tends  to  strengthen  the  action  of  the  other  fac- 
tors, but  it  does  so  alternatively,  not  cumulatively." 
That  is  to  say,  that  factor  which  confers  the  greater 
advantage  on  present  goods  always  stands  out  from 
the  other  as  the  active  agent.  Say,  for  example, 
that  the  first  factor  (the  circumstances  of  provision), 
together  with  the  second  factor  (that  of  perspective), 
taken  cumulatively,  would  give  present  goods  an  ad- 
vantage of  thirty  per  cent.,  while  the  factor  of  pro- 
ductivity would  give  an  advantage  of  twenty-five  per 


*  Positive  Theory  of  Capital,  p.  270. 
f  Ibid.,  p.  273. 


CRITICISM   OF  THE   EXCHANGE  THEORY  OF   INTEREST.     205 

cent.,  we  should  not  get  a  total  advantage  of  fifty- 
five  per  cent.,  but  of  thirty  per  cent.,  the  advantage 
being  based  on  the  stronger  factor/' 

From  this  it  is  manifest  that  the  writer  regards 
the  third  factor  as  acting  in  the  same  direction  as  the 
other  two.  Again,  though  he  holds  that  the  three 
factors  are  not  cumulative  in  their  effect,  he  never- 
theless maintains  that  they  may  vary  in  their  effect, 
that  one  may  be  greater  than  the  other ;  in  which 
case,  under  the  law  of  alternate  values,  the  value  is 
determined  by  the  greater  of  the  two.  In  other 
words,  he  seems  to  regard  the  third  factor,  the  tech- 
nical superiority  of  present  goods,  not  as  one  of  two 
or  more  variables  that  enter  into  the  determination, 
but  as  an  entirely  independent  and  self-sufficient 
cause  of  the  higher  valuation  of  present  goods,  and 
so  of  interest. 

Now,  it  is  clear  that  the  multiplication  of  com- 
modities, if  operating  in  entire  independence  of  the 
other  two  factors,  can  at  most  only  give  rise  to  an  in- 
cre'ase  in  utility  and  not  to  an  increase  in  value. 
The  indefinite  general  concept  of  utility  is  only  con- 
verted into  the  more  definite  concept  of  marginal 
utility  or  value  by  the  limitation  of  the  supply,  and 
this  is  accomplished  by  abstinence  or  by  the  operation 
of  the  first  two  factors.  In  other  words,  we  cannot 
have  a  valuation  of  thirty  set  by  disutility,  and  a 
valuation  of  twenty-five  set  by  utility,  for  we  are 
here  dealing  with  normal  value  or  with  the  case  in 
which  marginal  utility  and  marginal  disutility  must 


206  VALUE   AND   DISTRIBUTION. 

coincide.  How,  then,  can  it  be  said  that  either  factor 
is  an  independent  cause  of  the  higher  valuation  of 
present  goods,  and  so  of  interest  ?" 

(b)   THE  TECHNICAL   SUPERIORITY   or   PRESENT 

GOODS  DOES  NOT  NECESSARILY  RESULT  IN  AN  IN- 
CREASE IN  VALUE. — Since  we  here  have  to  deal  with 
a  proposition  which  Bohm-Bawerk  holds  to  be  the 
"  chief  pillar"  of  his  theory  of  interest,  it  will  be 
well  to  let  him  state  his  own  case  somewhat  in  detail. 
He  writes :  "  Suppose  that,  in  the  year  1888,  we 
have  command  of  a  definite  quantity  of  productive  in- 
struments, say,  thirty  days  of  labor,  we  may,  in  terms 
of  the  above  proposition,  assume  something  like  the 
following.  The  month's  labor,  employed  in  methods 
that  give  a  return  immediately,  and  are,  therefore, 
very  unremunerative,  will  yield  only  100  units  of 
product ;  employed  in  a  one  year's  process,  it  yields 
200  units,  but,  of  course,  yields  them  only  for  the 
year  1889  ;  employed  in  a  two  years'  process  it  yields 
280  units — for  the  year  1890 — and  so  on  in  increasing 
progression  :  say,  350  units  for  1891,  400  for  1892, 
440  for  1893,  470  for  1894,  and  500  for  1895." 

If  the  month's  labor  is  riot  employed  in  production 
until  1889  it  would  start  in  the  same  way  with  100 
units  of  product  in  1889  and  would  increase  in  each 
succeeding  year,  but  would  only  reach  470  units  of 
product  in  1895.  In  the  same  way  a  month's  labor 
which  is  not  employed  in  production  until  1890 
would  start  with  100  units  of  product  in  1890,  but 
would  only  reach  440  units  in  1895.  This  is  ex- 


CRITICISM   OF  THE  EXCHANGE  THEORY  OF  INTEREST.    207 

hibited  by  Bohm-Bawerk  in  the  following  tabulated 
statement : 


A  MONTH'S  LABOR  OF  THE  YEAR. 


1 

a 

o 

a 

o 

8 


1888 
1889 
1890 
1891 
1892 
1893 
1894 
1895 


1888. 

1889. 

1890. 

1891. 

100 

200 

100 

.  . 

.  . 

280 

200 

100 

350 

280 

200 

100 

400 

350 

-280 

200 

440 

400 

350 

280 

470 

440 

400 

350 

500 

470 

440 

400 

From  this  it  is  manifest  that  if  we  take  any  par- 
ticular year,  say  1892,  the  month's  labor  which  was 
first  employed  in  1888,  or  in  a  five  years'  process,  will 
yield  400  units  of  product,  while  that  which  was  first 
employed  in  1889,  or  in  a  four  years'  process,  only 
yields  350  units.  And  so,  whatever  year  is  taken, 
the  longer  production  period  yields  the  greater  quan- 
tity of  product.  Bohm-Bawerk  then  proceeds  to  ask : 

"  But  is  it  superior  also  in  the  height  of  its  mar- 
ginal utility  and  value  ?  Certainly  it  is.  For  if,  in 
every  conceivable  department  of  wants  for  the  sup- 
ply of  which  we  may  or  shall  employ  it,  it  puts  more 
means  of  satisfaction  at  our  disposal,  it  must  have  a 
greater  importance  for  our  well-being.  Of  course,  I 
am  aware  that  the  greater  amount  need  not  always 
have  the  greater  value  ; — a  bushel  of  corn  in  a  year 


208  VALUE  AND  DISTRIBUTION. 

of  famine  may  be  worth  more  than  two  bushels  after 
a  rich  harvest ;  a  silver  shilling  before  the  discovery 
of  America  was  worth  more  than  five  shillings  are 
now.  But  for  one  and  the  same  person,  at  one  and 
the  same  point  of  time,  the  greater  amount  has  always 
the  greater  value ;  whatever  may  be  the  absolute 
value  of  the  bushel  or  the  shilling,  this  much  is  cer- 
tain, that,  for  me,  two  shillings  or  two  bushels  which 
I  have  to-day  are  worth  more  than  one  shilling  or 
one  bushel  which  I  have  to-day.  And  in  our  com- 
parison of  the  value  of  a  present  and  a  future  amount 
of  productive  instruments  the  case  is  exactly  similar. 
Possibly  the  470  units  of  product  which  may  be 
made  from  a  month's  labor  in  1889  for  the  year 
1895,  are  worth  less  than  the  350  units  which  may 
be  got  from  the  same  for  the  year  1892,  and  the  lat- 
ter, notwithstanding  their  numbers,  may  be  the  most 
valuable  product  which  can  be  made  out  of  a  month 
of  1889  in  general.  In  any  case  the  400  units  which 
a  man  can  gain  by  a  month's  labor  of  the  year  1888  for 
the  year  1892  are  still  more  valuable,  and  therefore 
the  superiority  of  the  earlier  (present)  amount  of  pro- 
ductive instruments — here  and  everywhere,  however 
the  illustration  may  be  varied — remains  confirmed." 
Now,  while  we  here  have  an  explicit  recognition  of 
the  fact  that  "  the  greater  amount  need  not  always 
have  the  greater  value,"  and  this  because  of  the  de- 
cline in  marginal  utility,  yet  I  would  ask,  has  not 
Bohm-Bawerk  ignored  this  fact  in  his  final  con- 
clusion ?  For  when  he  insists  that  the  400  units 


CRITICISM  OF  THE  EXCHANGE  THEORY  OF  INTEREST.     209 

which  result  from  a  five  years'  productive  period 
must  have  a  greater  value  than  the  350  units  which 
result  from  a  four  years'  period,  he  clearly  assumes 
that  the  marginal  utility  or  value  per  unit  remains 
unchanged  despite  the  increase  in  the  supply  of  the 
commodity  from  350  to  400  units. 

If  the  50  units  is  but  an  insignificant  part  of  the 
total  supply,  it  may  well  happen  that  the  addition  of 
this  amount  will  not  appreciably  affect  the  marginal 
utility  or  value  per  unit  of  tte  commodity.  In  this 
case  the  total  value  of  the  400  units  would,  of  course, 
be  greater  than  the  total  value  of  the  350  units.  But 
if  the  increase  in  quantity  of  product  is  a  consider- 
able part  of  the  total  supply  of  the  commodity  its 
marginal  utility  may  suffer  a  rapid  decline.  In  that 
event  it  might  readily  happen  that  the  total  value  of 
the  400  units  will  be  less  than  the  total  value  of  the 
350  units  would  have  been  if  we  had  contented  our- 
selves with  the  shorter  production  period.  Under 
such  circumstances  one  who  controls  a  large  share 
of  the  total  product  might  find  it  profitable  to  shorten 
the  period  of  production,  for  the  same  reason  that  the 
Dutch  East  India  Company  destroyed  a  portion  of 
their  crops  in  years  of  over-abundant  harvests.  A 
glance  at  Fig  10,  which  was  employed  to  illustrate 
this  oft-quoted  experience,  will  reveal  the  conditions 
under  which  an  increase  in  product  will  result  in 
an  increase  in  total  value.  For  since  total  value  is 
the  quantity  of  product  multiplied  by  the  marginal 
utility  or  value  per  unit,  it  follows  that  this  total 

14 


210 


VALUE   AND   DISTRIBUTION. 


FIG.  10. 


value  can  only  increase  when  the  increase  in  product 
is  greater  than  the  decrease  in  marginal  utility.  In 

other  words,  Bohm- 
Bawerk  has  not  only 
failed  to  show  that  the 
increase  in  quantity  of 
product,  which  is  the 
outcome  of  a  longer 
period  of  production, 
will  necessarily  result 
in  an  increase  in  total 
value,  but  from  the 
very  nature  of  the  case 
it  is  impossible  to  show 

any  such  necessary  connection  between  an  increase 
in  quantity  and  an  increase  in  value.  But  while 
their  association  may  not  be  of  universal  or  even  of 
general  occurrence,  yet  it  may  be  realized  with  suffi- 
cient frequency  to  afford  profitable  employment  for 
the  available  supply  of  capital.  And  I  take  it  that 
here  again  this  is  all  that  is  necessary  for  the  pur- 
poses of  Bohm-Bawerk's  Theory  of  Interest. 

(c)  TECHNICAL  SUPERIORITY  OF  PRESENT  GOODS 
is  NOT  AN  ESSENTIAL  CONDITION  OF  INTEREST. — 
That  the  technical  superiority  of  present  goods  in 
the  sense  of  an  increase  in  the  quantity  of  product 
is  not  an  essential  condition  of  interest  may  be  shown 
by  reference  to  that  good  old  example  by  which,  as 
Bohm-Bawerk  has  said,  "many  an  interest  theory 
has  been  tested  and  found  false."  We  refer,  of 


CRITICISM  OF  THE   EXCHANGE  THEORY  OF  INTEREST.     211 

course,  to  the  case  of  wine,  whose  value  increases 
with  its  age.  Here,  as  is  manifest,  the  increase  in 
value  is  entirely  independent  of  any  change  in  quan- 
tity or  volume.  The  same  is  true  of  ice  cut  in 
January  for  use  in  July,  and  indeed  of  a  host  of 
other  commodities.  The  case  of  ice  is  noted  by 
Bohm-Bawerk,  but  is  dismissed  as  exceptional  and 
unimportant.  Yet,  rightly  understood,  this  case  will 
be  found  far  more  typical  of  the  phenomena  of  in- 
terest than  those  manufactured  goods  in  which  there 
is  a  multiplication  of  commodities.  As  already 
noted,  this  writer  accents  the  increase  in  commodi- 
ties far  too  strongly.  He  thus  loses  sight  of  the 
fact  that  from  the  stand-point  of  the  Marginal  Utility 
Theory  of  Value,  the  typical  cases  of  interest  are  those 
in  which  this  phenomenon  is  entirely  independent 
of  any  physical  change  in  the  commodity,  or  those 
in  which  the  increase  in  value  is  determined  from 
the  side  of  the  consumer  rather  than  from  the  side 
of  the  producer, — by  the  growing  demand  rather 
than  by  the  growing  supply.  For,  while  it  is  in  a 
measure  true  that  the  greater  value  of  ice  in  summer 
is  due  to  the  fact  that  its  supply  is  more  limited  than 
in  winter,  it  is  equally  true  that  this  increase  in  value 
is  in  part  due  to  the  increase  in  demand  that  arises 
with  the  return  of  warm  weather.  In  other  words, 
the  phenomenon  of  interest,  or  of  surplus  value,  is 
here  realized  in  its  simplest  form.  The  commodity 
is  physically  complete  in  quantity  and  kind,  yet  it 
still  continues  to  grow  in  value,  and  that,  too,  as  a 


212  VALUE  AND  DISTRIBUTION. 

function  of  time.  This  manifestly  holds  true  for 
all  goods  that  are  produced  in  anticipation  of  a 
market,  for  it  is  practically  impossible  amid  the 
complications  of  modern  industry  to  so  time  the 
process  of  production  that  the  commodity  will  reach 
physical  completion  at  the  very  instant  that  the  con- 
sumer is  ready  to  take  possession  of  it.  Unless  this 
perfect  adjustment  in  time  is  realized,  the  good  must 
wait  on  the  demand  before  it  can  develop  its  full  value. 

But,  after  all,  the  single  case  of  wine  is  sufficient 
for  the  purposes  of  our  argument.  For  it  may  fairly 
be  urged  that  the  exception  which  was  sufficient  to 
overthrow  one  theory  of  interest  must  be  as  strong 
against  every  other  theory  that  fails  to  account  for  it 
in  a  satisfactory  way.  If  the  third  factor,  defined  by 
Bohm-Bawerk  as  the  multiplication  of  commodities,  is 
a  necessary  condition  of  interest,  then  it  is  in  order  for 
the  advocates  of  the  Exploitation  Theory  of  Interest 
to  rule  out  the  surplus  value  of  aging  wine  as  having 
no  connection  with  the  phenomenon  of  interest. 

The  confusion  in  this  part  of  Bohm-Bawerk's 
argument  seems  to  be  caused,  as  we  have  already 
said,  by  the  undue  accent  which  he  has  thrown  upon 
those  cases  where  the  phenomenon  of  interest  is  asso- 
ciated with  an  increase  in  the  quantity  of  commodi- 
ties. This  has  led  to  the  tacit  assumption  that  an 
objective  increase  of  commodities  is  a  necessary  con- 
dition of  interest.  And  yet  it  must  be  remembered 
that  no  one  has  insisted  more  strongly  than  the 
Austrians  that  economists  have  primarily  to  deal  not 


CRITICISM   OF  THE  EXCHANGE  THEORY  OF  INTEREST.    213 

with  commodities  but  with  utilities,  and  that  these 
utilities  only  become  matters  of  economic  interest 
when  there  is  some  limitation  of  their  supply. 

Nor  is  this  defect  in  Bohm-Bawerk's  treatment  of 
the  subject  a  mere  question  of  accent,  for  he  totally 
ignores  those  instances  or  conditions  under  which  this 
surplus  of  value  may  arise  without  an  increase  in  the 
quantity  ol  product.  In  other  words,  the  technical 
superiority  of  present  goods  is  always  restricted  to  an 
increase  in  quantity  of  product,  and  his  entire  dis- 
cussion of  this  part  of  the  subject  is  confined  to  an 
attempt  to  show  that  this  increase  in  quantity  will 
necessarily  result  in  an  increase  in  value.  Again, 
this  increase  in  quantity  of  product,  or  the  technical 
superiority  of  present  goods,  is  nowhere  recognized 
as  a  frequent  but  unessential  condition  of  interest. 
On  the  contrary,  he  declares  that  it  is  the  "chief 
pillar"  of  his  theory  of  interest  (pages  264  and  270), 
just  as  he  elsewhere  declared  that  the  superior  value 
of  present  goods  is  the  very  "  centre  and  kernel"  of 
that  theory.  In  conclusion,  I  can  only  hope  that  the 
limitations  of  this  criticism  of  the  Exchange  Theory 
of  Interest  will  be  clearly  recognized.  For  despite 
what  has  here  been  written,  I  believe  that  the  essen- 
tial elements  of  the  Exchange  Theory  will  stand  im- 
pregnable against  all  assaults.  In  other  words,  it 
actually,  if  not  formally,  recognizes  the  three  essential 
elements,  productivity,  time,  and  abstinence,  and 
rightly  holds  that  the  phenomenon  of  interest  in- 
volves an  exchange  of  present  for  future  goods. 


CHAPTER    IX. 

THE  MARGINAL  PRODUCTIVITY  THEORY  OF 
INTEREST. 

WE  have  seen  that  Bohm-Bawerk  prefaced  his 
discussion  of  the  "  Exchange  Theory  of  Interest" 
by  an  attempt  to  determine  just  what  is  meant  by 
capital.  It  will  therefore  be  necessary  to  compare 
his  concept  of  capital  with  the  concepts  developed 
by  Clark  in  his  discussion  of  the  Marginal  Produc- 
tivity Theory  of  Interest. 

I.  COMPETING  CONCEPTS  OF  CAPITAL 

110.  Capital  as  a  Sum  of  Concrete  Commodities. 
— Bohm-Bawerk,  as  we  have  seen,  defines  capital 
as  the  "sum  of  intermediate  products."     In  other 
words,  the  only  concept  of  capital  that  he  has  in  mind 
is  a  sum  of  concrete  commodities.     It  will  now  be 
shown  that  there  is  still  another  concept  of  capital, 
and  one  which,  for  the  purposes  of  the  theory  of  in- 
terest, is  far  more  important  than  that  to  which  he 
has  called  attention. 

111.  Capital  as  a  Mobile,  Homogeneous  Fund. — 
We  get  some  hint  of  this  second  concept  as  far  back 
as  Calvin's  attempt  to  justify  interest  on  the  ground 
that  the  entrepreneur  employs  his  borrowed  capital 
in  ways  that  yield  him  a  larger  return  than  the  in- 
terest which  he  pays  for  the  use  of  capital.     That  is 

214 


THE  MARGINAL  PRODUCTIVITY  THEORY  OF  INTEREST.    215 

to  say,  the  return  secured  by  particular  concrete 
forms  of  capital  may  be  more  than  the  general,  average, 
or  level  return  secured  by  capital  throughout  the 
whole  range  of  industry.  Any  monopoly  advantage 
that  may  exist  attaches  to  the  ownership  of  the  con- 
crete intermediate  products,  and  so  is  secured  by  their 
owners  ;  the  capitalist  being  constrained  to  content 
himself  with  a  non-monopoly  retu^^w  with  a  nor- 
mal rate  of  interest.  This  is  the  raB  •  <  1  for  capital 
conceived  as  a  sort  of  abstract1,  mol^B^iomogeneous 
fund  capable  of  embodiment  in  an j  lorm  the  entre- 
preneur may  desire.  This  is  interest  per  se. 

Frequent  statements  may  be  found  in  economic 
literature  which,  if  followed  to  their  legitimate  con- 
clusion, would  undoubtedly  lead  to  this  concept  of 
capital,  but  it  was  not  until  J.  B.  Clark  published  his 
"  Law  of  Wages  and  Interest"  *  that  thij  thought  was 
elaborated  and  given  clear  and  definite  statement. 
His  contention  is  that  it  is  not  materials,  machines, 
or  buildings  that  the  capitalist  loans,  but  a  sort  of 
general  draft  upon  society, — value  in  _a  readily  con- 
vertible form ;  a  sort  of  abstract  fund  which  the  en- 
trepreneur converts  into  concrete  intermediate  prod- 
ucts. Then,  too,  the  embodiment  of  this  abstract 
fund  in  various  concrete  forms  is  not  a  permanent 
transaction.  Materials  are  used  up;  machines  and 
plants  wear  out ;  but  while  doing  so  money  is  earned 
with  which  we  can  buy  others.  In  this  way,  while 

*  Annals  of  American  Academy,  July,  1890. 

'•s 


216  VALUE  AND  DISTRIBUTION. 

the  concrete  intermediate  products  are  continuously 
changing,  the  abstract  fund  remains  intact. 

Again,  the  money  earned  while  the  machines,  etc., 
are  wearing  out  may  be  invested  in  an  entirely  dif- 
ferent kind  of  machine  or  in  an  entirely  different 
industry.  While  an  anvil  cannot  be  transmuted 
into  a  loom  m^  a  forge  into  a  woollen-mill,  yet  the 
capital  originally  invested  in  anvil  and  forge  may 
be  invested  lin  loom  and  woollen-mill  if  the  money 
earned  by  anvil  and  forge  is  sufficient  to  pay  for 
loom  and  mill.  It  is  in  this  way  that  capital  may 
be  taken  out  of  the  less  productive  and  invested  in 
the  more  productive  industries.  In  other  words,  the 
capital  which  we  here  have  in  mind  is  not  only  an 
abstract  but,  as  well,  a  mobile,  homogeneous  fund. 

II.    RATE  OF  INTEREST  FIXED  BY  MARGINAL  PRODUCTIVITY, 

This  brings  us  to  the  question,  What  do  we  mean 
by  the  general,  average,  or  level  rate  of  interest  ? 
Von  Thiinen  long  since  declared  that  interest  is  de- 
termined by  the  return  secured  by  "  the  last  dose  of 
capital"  whose  employment  is  economically  permis- 
sible. This  thesis  is  developed  at  considerable  length 
by  Clark,  who  writes  as  follows :  "  If  population  be 
fixed  and  pure  capital  increases,  what  must  the  new 
capital  do  ?"  To  this  he  makes  answer :  "  It  must 
take  less  and  less  productive  forms  of  outward  embodi- 
ment" Here,  as  elsewhere,  value  is  determined  by 
marginal  utility.  The  entrepreneur  will  not  pay 
more  for  one  portion  of  the  mobile,  homogeneous  fund 


THE  MARGINAL  PRODUCTIVITY  THEORY  OF  INTEREST.    217 

which  he  borrows  from  the  capitalist  than  he  can  earn 
with  the  last  portion.  If  the  capitalist  should  insist 
on  a  greater  return  the  entrepreneur  would  decrease 
the  amount  he  would  borrow,  and  a  portion  of  the 
capitalist's  funds  would  remain  unemployed.  "  This 
means,  in  current  scientific  phrase,  that  the  final 
utility  of  capital  is  reduced,  and,  by  the  most  familiar 
of  commercial  principles,  this  fact  reduces  the  mar- 
ket value  of  the  whole  supply.  General  interest  is 
gauged  by  the  earnings  of  the  instrument  that  the 
employer  or  initiator  procures  with  the  final  increment 
of  borrowed  capital" 

112.  Clark  on  the  Mobility  of  Capital. — "How  this 
commercial  principle,  that  price  is  governed  by  final 
utility,  applies  to  capital  we  may  see  by  a  simple 
illustration.  There  might  seem  to  be  a  difficulty  in 
the  case,  arising  from  the  fact  that  capital  in  its  con- 
crete forms  is  not  homogeneous.  The  utility  of  the 
last  increment  of  wheat  clearly  fixes  the  price  of  the 
entire  crop ;  but  the  last  bushel  of  wheat  does  not 
set  the  price  of  the  last  pound  of  wool.  Why,  then, 
should  the  utility  of  capital  in  the  shape  of  paint- 
brushes set  the  loan  rate  of  capital  in  the  shape  of 
ploughs  ?  It  does  this,  as  we  shall  quickly  see ;  and  if 
we  are  willing  to  look  a  little  more  closely  we  shall 
see  not  only  that  the  utility  of  the  pure  capital  in 
the  paint-brushes  governs  the  price  of  the  capital  in 
the  ploughs,  but  that  the  actual  earnings  of  the  less 
necessary  implements,  as  they  are  used  by  employers, 
determine  the  earnings  of  the  more  necessary  ones. 


218  VALUE  AND  DISTRIBUTION. 

It  is  as  though  ploughs,  spades,  wagons,  engines,  oxen, 
paint-brushes,  etc.,  were  as  homogeneous  as  kernels 
of  wheat.  We  shall  quickly  see  how  this  comes  to 
be  true. 

"  Let  there  be  an  isolated  community  living  on 
an  island  of  the  sea  with  a  due  variety  of  natural 
products,  and  let  a  dozen  families  furnish  the  work- 
ing force.  Give  to  them  now  their  first  instalment 
of  tools ;  it  will  take  the  shape  of  the  instrument 
that  is  most  needed,  let  us  say  an  axe !  If  there  be 
a  capitalist  in  the  case, — we  care  not  for  the  present 
who  or  where  he  is, — he  can  get  for  his  loan  approxi- 
mately what  the  axe  adds  to  the  product  created  by 
the  community.  Let  him  furnish  now  a  second  in- 
stalment of  pure  capital,  or  productive  wealth,  con- 
vertible into  any  form ;  can  he  get  as  much  for  it  as 
for  the  first?  He  could  do  so  if  the  second  unit 
were  as  productive  as  the  first,  but  it  is  not  so.  It 
must  take  the  shape  of  an  implement  that  is  less 
sorely  needed  than  was  the  axe,  let  us  say  a  spade. 
It  is  the  product  that  the  spade  adds  to  the  gains  of 
the  community  that  gauges  the  reward  of  the  capital 
embodied  in  it ;  and  that  product  is  less  than  was 
that  of  the  axe. 

"  Why,  however,  may  there  not  be  two  rates  of  in- 
terest, one  for  each  of  the  units  of  pure  capital  ?  Is 
not  the  axe  as  necessary  as  ever?  Why  may  not 
the  owner  of  the  capital  that  is  embodied  in  it  get  as 
much  as  ever  ?  Why  may  he  not  demand  and  get 
all  that  the  employer  and  the  community  back  of 


THE  MARGINAL  PRODUCTIVITY  THEORY  OF  INTEREST.    219 

the  employer  are  willing  to  pay  for  having  trees 
felled  and  wood  split  ?  Must  a  highly  useful  imple- 
ment be  degraded  by  the  presence  of  a  less  useful 
one,  and  submit  to  be  rated  lower  by  the  reason  of 
its  company  ?  It  must  submit  to  exactly  that.  Its 
importance  to  the  community  is  diminished  by  the 
presence  of  its  inferior  fellow-implement.  If  the 
axe  were  lost  altogether,  its  work  would  now  be  car- 
ried on  notwithstanding  its  absence.  There  was  a 
time  when  the  loss  of  an  axe  meant  the  cessation  of 
wood-cutting ;  now  it  no  longer  means  this ;  wood- 
cutting goes  on,  though  something  else  stops. 

"  Tools  themselves  are  not  interchangeable ;  one 
cannot  do  the  work  of  the  other.  The  units  of  pure 
capital  in  them  are  interchangeable ;  one  may  do  the 
work  of  the  other,  and  all  are,  therefore,  equally 
important.  We  may  easily  test  this  principle.  The 
product  of  anything  may  be  treated  by  supposing 
that  it  is  annihilated  and  ascertaining  how  much  the 
output  of  the  working  force  is  thereby  diminished. 
As  the  second  unit  of  pure  capital  is  about  to  em- 
body itself  in  the  spade^  let  us  destroy  the  axe. 
Will  the  community  get  on  without  this  implement  ? 
If  so,  the  loss  is  measured  by  the  full  amount  of  its 
productive  power ;  but  they  will  not  do  so ;  they  will 
at  once  restore  the  axe.  The  unit  of  capital  that 
was  about  to  embody  itself  in  a  spade  will  now  take 
the  form  of  the  more  necessary  implement,  and  the 
actual  loss  that  the  community  suffers  is  that  of  the 
spade.  By  taking  away  the  axe  we  have  actually 


220  VALUE  AND  DISTRIBUTION. 

forced  the  men  to  get  on  without  a  spade,  and  the 
loss  inflicted  on  them  is  measured  by  the  product  of 
the  spade. 

"  Let  there  be  a  third  increment  of  capital,  taking 
the  shape  of  a  saw.  The  work  of  all  three  will  go 
on  together,  but  the  real  importance  of  the  units  of 
capital  in  them  will  in  each  case  be  gauged  by  the 
efficiency  of  the  saw.  Remove  at  any  time  one  of 
the  more-needed  tools,  and  the  community  will  re- 
place it  by  foregoing  the  one  that  stands  in  the 
series  as  last  and  least  necessary.  Interest  is  paid 
not  for  concrete  things,  but  for  pure  capital;  and  that 
passes  freely  from  form  to  form,  and  is  everywhere 
equally  rewarded.  It  is  as  homogeneous  in  the  ab- 
stract as  wheat,  and  the  price  of  it  is  as  amenable  as 
is  the  price  of  wheat  to  the  law  of  final  utility"  * 

It  hardly  seems  necessary  to  add  anything  to  this 
very  able  discussion  except  the  following  brief  sum- 
mary. It  is  here  made  clear,  first,  that  there  are  two 
concepts  of  capital, — one  as  a  sum  of  concrete  instru- 
ments, and  the  other  as  the  abstract,  mobile,  homo- 
geneous fund,  which  finds  embodiment  in  these  con- 
crete forms.  Secondly,  it  has  here  been  shown  that 
interest  is  the  return  secured  by  capital  under  this 
latter  conception.  Thirdly,  the  rate  of  interest  is  de- 
termined by  the  marginal  productivity  of  this  mobile, 
homogeneous  fund  of  capital,  or  by  its  product  in  the 

*  Law  of  Wages  and  Interest,  pp.  5-13,  Annals  of  Ameri- 
can Academy,  July,  1890. 


THE  MARGINAL  PRODUCTIVITY  THEORY  OF  INTEREST.    221 

least  productive  industry  in  which  its  employment  is 
economically  permissible. 

A  theory  that  thus  limits  the  determination  of 
interest  to  the  very  definite  concept  of  the  marginal 
productivity  of  capital,  is,  of  course,  a  great  advance 
upon  the  earlier  and  more  indefinite  productivity 
theory.  But  even  yet  we  are  far  from  the  solution 
of  the  interest  problem ;  for  though  it  is  true  that 
interest  may  be  measured  in  terms  of  the  marginal 
productivity  of  capital,  the  question  still  remains, 
What  fixes  this  margin  ?  What  determines  the  sup- 
ply of  capital  ?  This  problem  will  be  taken  up  in 
the  next  chapter. 


CHAPTER    X. 

THE  NORMAL- VALUE  THEORY  OF  INTEREST. 

IN  the  review  of  the  various  theories  of  interest 
that  have  from  time  to  time  been  proposed,  it  was 
seen  that  the  advocates  of  the  Use  Theory  clearly 
recognized  the  important  part  played  by  the  time  ele- 
ment, while  the  Productivity  and  Abstinence  Theories 
severally  accented  the  importance  of  productivity  and 
abstinence,  or  of  utility  and  disutility.  In  the  Ex- 
change Theory  there  is  a  very  marked  advance  upon 
all  previous  attempts  to  solve  this  problem,  in  that  it 
clearly  and  formally  recognizes  that  time  and  prod- 
uctivity are  both  essential  conditions  of  interest ;  it 
also  takes  cognizance  of  disutility  or  abstinence  under 
the  headings  of  "  Difference  in  Provision"  and  "  Un- 
derestimate of  the  Future."  It  is  true  that  in  Bohm- 
Bawerk's  development  of  this  theory  there  is  little  to 
suggest  that  he  was  at  all  conscious  of  the  fact  that 
he  had  here  reintroduced  that  abstinence  which  he 
so  uncompromisingly  repudiates  in  other  parts  of  his 
work,  but  that  he  has  so  reintroduced  it  I  hope  I  have 
succeeded  in  showing.  Any  logical  inconsistency 
that  may  have  resulted  from  his  admission  of  absti- 
nence or  disutility  as  an  essential  element  in  the  in- 
terest problem  is  more  than  balanced  by  the  greater 
completeness  and  truth  of  the  theory  of  interest  which 

he  has  proposed. 
222 


THE  NORMAL-VALUE  THEORY  OF  INTEREST.         223 

I.  INTEREST  A  PROBLEM  IN  NORMAL  VALUE, 

At  the  close  of  the  preceding  chapter  it  was  urged 
that  even  the  very  definite  concept  of  marginal  prod- 
uctivity fails  satisfactorily  to  explain  the  interest 
problem.  It  was  also  seen  that  we  are  here  dealing 
with  a  mobile,  homogeneous  fund.  From  this  it  is 
an  easy  step  to  the  further  conclusion  that  we  are 
here  dealing  with  the  conditions  of  free  competition 
or  with  normal  value,  hence  marginal  utility  and 
marginal  disutility  will  here  coincide  and  mutually 
limit  each  other.  Given  the  productivity  of  capital, 
the  marginal  point  is  fixed  by  the  supply  of  capital, 
and  this  in  the  case  of  the  mobile,  homogeneous  fund 
of  capital  is  limited  by  marginal  disutility  or  absti- 
nence. Hence  it  may  be  maintained  that  marginal 
productivity  and  marginal  abstinence  are  of  equal 
importance  in  determining  the  rate  of  interest. 

113.  The  Source  of  Bohm-Bawerk's  Error. — Let 
us  now  ask,  How  has  it  happened  that  Bohm- 
Bawerk  has  failed  to  recognize  this  most  important 
truth  ?  For  one  is  seldom  contented  with  convict- 
ing so  acute  a  thinker  of  serious  error  unless  it  is 
seen  just  how  he  was  betrayed  into  it.  In  the  first 
place,  I  would  urge  that  the  concept  of  capital  as  an 
abstract,  mobile,  homogeneous  fund  is  not  one  that  lies 
on  the  face  of  things.  Again,  it  must  be  remembered 
that  Bohm-Bawerk  approaches  the  question  from  the 
stand-point  of  the  Marginal  Utility  Theory  of  Value, 
and  that  in  the  establishing  of  this  theory  he  has 


224  YALUE  AND   DISTRIBUTION. 

been  at  some  pains  to  prove  that  scarcity  values  are 
the  rule  rather  than  the  exception.  With  this  fact 
clearly  established,  so  far  as  concrete  commodities 
are  concerned,  he  passed  over  to  the  interest  prob- 
lem, and,  having  defined  capital  as  a  sum  of  concrete 
intermediate  products,  he  could  not  well  avoid  the 
conclusion  that  interest  is  the  return  secured  by  capi- 
tal as  a  sum  of  concrete  commodities.  From  this  it 
seemed  to  follow  that  a  theory  of  interest  which  only 
accounted  for  the  earnings  of  freely  reproducible 
goods,  an  exceedingly  limited  share  of  all  concrete 
commodities,  must  be  a  totally  inadequate  theory  of 
interest.  And  so  we  found  that  Bohm-Bawerk's  most 
serious  objection  to  Senior's  Abstinence  Theory  was 
that  "  he  has  made  his  interest  theory  part  of  a  theory 
of  value  in  which  he  explains  the  value  of  goods  by 
their  cost,"  hence  "  it  can  only  be  in  the  most  favor- 
able circumstances  a  partial  interest  theory.  It  might 
explain  those  profits  that  are  made  in  the  production 
of  goods  produced  at  will,  but  logically  every  other 
kind  of  profit  would  escape  it  altogether."  * 

The  obvious  answer  to  all  this  is,  that  the  only 
form  of  profit  to  which  we  can  apply  the  term  in- 
terest is  such  as  arises  under  free  competition. 

Bohm-Bawerk  here  follows  the  defective  analysis 
or  want  of  analysis  of  the  older  economists.  He 
confounds  the  surplus  which  arises  from  the  mo- 
nopoly  inherent  in  concrete  forms  with  the  normal 

*  Capital  and  Interest,  p.  286. 


THE  NORMAL  VALUE  THEORY  OF  INTEREST.    225 

surplus,  which  is  the  earning  of  capital  as  a  mobile, 
homogeneous  fund.  If  the  familiar  terms  profit  and 
interest  are  retained,  then  there  is  no  escape  from  con- 
fusion except  by  restricting  the  former  to  the  monop- 
oly and  the  latter  to  the  normal  surplus.  The  retain- 
ing of  these  every-day  terms  by  giving  them  a  more 
definite  and  restricted  meaning  is,  of  course,  attended 
with  some  disadvantages,  nor  is  their  retention  a  mat- 
ter of  serious  concern.  The  all-important  consid- 
eration is  the  recognition  of  the  essential  difference 
that  exists  among  the  three  forms  of  surplus.  On 
the  one  side  rent  or  the  price-determined  surplus, 
on  the  other  profit  and  interest  or  the  price-deter- 
mining surpluses.  These  last  being  distinguished 
from  each  other  by  the  fact  that  one  is  a  monopoly 
and  the  other  a  normal  surplus.  From  this  it  fol- 
lows that  in  the  determination  of  the  normal  surplus 
or  interest  utility  and  disutility  coincide :  hence  no 
theory  of  interest  can  be  complete  which  does  not 
recognize  the  part  played  by  abstinence  in  limiting 
the  supply  of  capital  and  so  co-operating  with  produc- 
tivity in  the  determination  of  the  rate  of  interest. 

114.  Bohm-Bawerk's  Confused  Recognition  of  the 
Part  played  by  Abstinence. — In  fairness  to  Bohrn- 
Bawerk  it  should  be  noted  that  he  does  occasionally 
recognize  that  abstinence  plays  a  part  in  the  deter- 
mination of  interest.  He  sees  that  the  supply  of 
productive  goods  is  limited,  and  that  it  can  all  find 
employment  in  industries  that  will  yield  a  surplus. 
This,  of  course,  raises  the  further  question,  What 

15 


226  VALUE   AND   DISTRIBUTION. 

limits  the  supply  of  capital  ?  Some  answer  to  this 
question  may  be  found  in  "  Capital  and  Interest," 
page  276,  where,  after  quoting  Lasalle's  brilliant  phi- 
lippic against  the  Abstinence  Theory,  Bo'hm-Bawerk 
continues,  "  This  brilliant  attack  notwithstanding,  I 
believe  there  is  a  core  of  truth  in  Senior's  doctrine. 
It  cannot  be  denied  that  the  making  as  well  as  the 
preservation  of  every  capital  does  demand  an  absti- 
nence from  or  postponement  of  the  gratification  of 
the  moment;  and  it  appears  to  me  to  admit  of  as 
little  doubt  that  this  postponement  is  considered  in, 
and  enhances  the  value  of  those  products  that,  under 
capitalist  production,  cannot  be  obtained  without  more 
or  less  of  such  postponement.  If,  e.g.,  two  commodi- 
ties have  required  for  their  production  exactly  the 
same  amount  of  labor,  say  one  hundred  days,  and 
that  one  commodity  is  ready  for  use  immediately  that 
the  labor  is  finished,  while  the  other — say  new  wine 
— must  lie  for  a  year,  experience  certainly  shows 
that  the  commodity  which  becomes  ready  for  use 
later  will  stand  higher  in  price  than  that  which  is 
ready  at  once,  by  something  like  the  amount  of 
interest  on  the  capital  expended."  Yet,  strangely 
enough,  Bohm-Bawerk  concludes,  and  in  this  same 
connection,  that  the  Abstinence  Theory  fails  because 
"  high  interest  is  often  got  where  the  sacrifice  of  ab- 
stinence is  very  trifling."  This,  too,  despite  the  fact 
that  in  his  discussion  of  value  he  has  so  strenuously 
insisted  that  the  marginal  is  the  determinant. 

Again,  he  writes :  "  In  making  this  calculation  it 

O  7  O 


THE  NORMAT/-VALUE  THEORY   OF   INTEREST.         227 

will  not  be  overlooked  that  the  institution  of  interest 
has  its  manifold  uses ;  particularly  as  the  prospect  of 
interest  induces  saving  and  accumulation  of  capital, 
and  this,  by  making  possible  the  adoption  of  more 
fruitful  methods  of  production,  becomes  the  cause  of 
a  more  abundant  provision  for  the  whole  people.  In 
this  connection  the  much  used  and  much  abused  ex- 
pression '  Reward  of  Abstinence'  is  in  its  proper 
place.  The  existence  of  interest  cannot  be  theoret- 
ically explained  by  it ;  one  cannot  hope  in  using  it 
to  say  anything  about  the  essential  nature  of  in- 
terest ;  every  one  knows  how  interest  is  simply  pock- 
eted without  any  abstinence  that  deserves  record. " 
Here  again  his  recognition  of  abstinence  is  confounded 
by  his  failure  to  recognize  that  it  is  marginal  absti- 
nence that  enters  into  the  determination  of  interest. 
This  confused  recognition  of  the  part  played  by  ab- 
stinence results  in  its  practical  repudiation  in  the 
earlier  part  of  Bohm-Bawerk's  discussion.  He  also 
fails  to  take  any  formal  cognizance  of  it  in  the  final 
statement  of  his  theory  of  interest,  though,  as  we 
have  shown,  he  actually  includes  it  in  that  state- 
ment, though  under  other  and  more  cumbersome 
terms.  That  this  recognition  of  the  part  played  by 
abstinence  is  necessary  to  a  complete  solution  of  the 
interest  problem  is,  of  course,  manifest  the  moment 
we  recognize  the  fact  that  we  are  here  dealing  with 
normal  value,  or  that  it  is  capital  as  a  mobile,  homo- 
geneous fund  that  earns  the  surplus  value  to  which 
we  have  given  the  name  interest.  While  the  Aus- 


228  VALUE  AND  DISTRIBUTION. 

trian  economists  are  undoubtedly  right  in  their  con- 
tention that  among  concrete  commodities  scarcity 
values  are  the  rule,  yet  when  we  come  to  capital  as 
the  earner  of  interest  per  se,  we  clearly  recognize  that 
we  here  have  the  conditions  of  ideal  free  competi- 
tion, or  those  conditions  in  which,  to  use  Marshall's 
phrase,  marginal  utility  and  marginal  disutility  "  co- 
operate like  the  two  blades  of  a  pair  of  shears." 

115.  Statement  of  the  Normal- Value  Theory. — 
From  this  it  follows  that  what  we  have  to  show  in 
any  theory  of  interest  is  not  that  the  multiplication 
of  commodities  will  necessarily  result  in  an  increase 
of  values,  but,  first,  that  the  roundabout  methods 
give  rise  to  an  increase  of  utilities ;  and,  secondly, 
that  the  supply  of  these  utilities  is  relatively  so  lim- 
ited that  the  increase  in  utilities  is  coincident  with  an 
increase  in  value,  or,  as  Bohm-Bawerk  has  himself 
written,  "It  is  because  the  stock  of  present  goods  is 
always  so  low  that  the  conjuncture  for  their  exchange 
against  future  goods  is  always  favorable"  ("  Positive 
Theory  of  Capital  and  Interest,"  p.  359.) 

Again,  he  writes  :  "  Now  it  can  be  shown,  and  with 
this  we  come  to  the  goal  of  our  long  inquiry,  that 
the  supply  of  present  goods  must  be  numerically  less 
than  the  demand.  The  supply  even  in  the  richest 
nation  is  limited  by  the  amount  of  the  people's  wealth 
at  the  moment.  The  demand,  on  the  other  hand,  is 
practically  infinite ;  it  continues  at  least  so  long  as  the 
return  to  production  continues  to  increase  with  the 
extension  of  the  production  process,  and  that  is  a 


THE   NORMAL-VALUE  THEORY   OF  INTEREST.         229 

limit  which,  in  the  richest  nation,  lies  far  beyond  the 
amount  of  wealth  possessed  at  the  moment."  (Page 
332.) 

Here,  then,  we  have  the  ultimate  facts  in  regard  to 
interest.  For  while  capitalistic  methods  eventually 
result  in  an  increase  of  the  supply  of  present  goods, 
and  so  tend  to  decrease  the  value  of  such  goods,  yet 
human  desires  continue  to  outrun  the  supply  of  pres- 
ent goods,  and  as  a  result  of  this  present  goods  are 
more  highly  valued  than  future  goods.  Again,  the 
adoption  of  roundabout  methods  depends  upon  the 
increasing  of  the  supply  of  capital.  If  this  supply 
should  be  indefinitely  increased,  capital  would  be 
forced  to  find  employment  in  less  and  less  productive 
industries  until  it  reaches  those  in  which  no  surplus 
value  can  be  realized.  In  other  words,  the  supply 
of  future  goods  would  become  so  abundant  that  men 
would  cease  to  value  them  more  highly  than  present 
goods.  Capital,  however,  is  not  thus  indefinitely  in- 
creased, and  this  for  the  reason  that  such  increase 
involves  the  exchange  by  the  marginal  saver  of  a 
present  for  a  future  good.  Hence,  so  long  as  man's 
desires  outrun  his  powers  of  production,  or  so  long  as 
present  goods  are  more  highly  valued  than  future 
goods,  an  exchange  of  the  former  for  the  latter  in- 
volves a  sacrifice  or  disutility.  It  is  this  that  tends  to 
restrain  the  increase  in  the  supply  of  capital,  and  so 
the  adoption  of  that  capitalistic  method  of  production 
whose  ultimate  effect  is  to  decrease  the  value  of  pres- 
ent goods. 


230  VALUE  AND  DISTRIBUTION. 

It  is  therefore  not  at  all  necessary  to  confound  the 
discussion  by  an  elaborate  attempt  to  show  that  the 
increase  in  the  quantity  of  commodity  which  results 
from  the  adoption  of  the  roundabout  methods  will- 
effect  an  increase  in  value.  The  explanation  is,  in 
simple,  that  man's  desires  so  outrun  his  powers  of  pro- 
duction that,  despite  the  increase  in  quantity  of  com- 
modity due  to  the  adoption  of  capitalistic  methods, 
the  supply  of  present  goods  is  for  many  people  so 
restricted  that  they  give  a  higher  valuation  to  these 
than  to  future  goods. 

If  we  wish  to  get  back  of  this  and  inquire  how  the 
supply  of  capital  and  so  the  ultimate  supply  of  pres- 
ent goods  is  thus  limited,  we  can  only  answer  that 
this  increase  in  the  supply  of  present  goods  depends 
in  the  first  instance  on  an  increase  in  the  supply  of 
capital.  Again,  this  increase  in  the  supply  of  capi- 
tal involves  an  exchange  of  present  for  future  goods, 
or  the  disutility  of  abstinence.  Hence,  in  last  resort, 
the  productivity  of  capital  and  so  the  ultimate  sup- 
ply of  present  goods  is  restricted  by  the  abstinence  or 
disutility  endured  by  the  marginal  saver  or  capitalist. 
That  is  to  say,  interest  is  a  case  of  normal  value ;  it 
may,  therefore,  be  measured  either  in  terms  of  mar- 
ginal productivity  or  of  marginal  abstinence,  but  it 
can  only  be  determined  by  the  joint  action  of  these 
two  factors. 

It  is  manifest  that  this  does  not  conflict  in  any 
way  with  Bohm-Bawerk's  thesis  that  interest  results 
from  an  exchange  of  present  for  future  goods.  The 


THE  NORMAL- VALUE  THEORY   OF  INTEREST.         231 

theory  here  proposed  is,  after  all,  but  an  extension  of 
Bohm-Bawerk's  analysis,  and  may  be  styled  either 
the  Exchange  Theory  or  the  Normal-Value  Theory 
of  Interest.  But  since  the  failure  to  recognize  the 
normal  character  of  the  phenomena  has  led  to  some 
confusion,  it  has  seemed  well  to  adopt  the  name  The 
Normal-Value  Theory  of  Interest. 


BOOK  1V.-WAGES. 


CHAPTER    I. 

THE  WAGES  FUND  DOCTRINE. 

THE  doctrine  that  there  is  a  fund  the  exact 
amount  of  which  must  be  expended  in  the  payment 
of  wages,  and  hence  that  average  wages  may  be  ob- 
tained by  dividing  this  sum  by  the  total  number 
of  laborers,  is  usually  credited  to  McCulloch.  As  a 
matter  of  fact,  this  doctrine  found  unqualified  state- 
ment as  early  as  the  publication  of  "  The  Wealth  of 
Nations."  (Book  I.  Chap.  VII.)  It  will  therefore  be 
in  order  to  begin  a  review  of  this  doctrine  with  Adam 
Smith's  contribution  to  the  subject. 

I.    THE  EARLIER  ADVOCATES  OF  THE  THEORY. 

116.  Adam  Smith  writes  :  "  The  demand  for  those 
who  live  by  wages,  it  is  evident,  cannot  increase  but 
in  proportion  to  the  increase  of  the  funds  which  are 
destined  for  the  payment  of  wages."  Again,  "  The 
demand  for  those  who  live  by  wages,  therefore,  neces- 
sarily increases  with  the  increase  of  the  revenue  and 
stock  of  every  country,  and  cannot  possibly  increase 
without  it.  The  increase  in  revenue  and  stock  is  the 
increase  of  national  wealth.  The  demand  for  those 

232 


THE  WAGES  FUND  DOCTRINE.  233 

who  live  by  wages,  therefore,  naturally  increases  with 
increase  of  national  wealth,  and  cannot  possibly  in- 
crease without  it."  He  also  writes :  "  The  diminution 
of  the  capital  stock  of  society  or  of  the  funds  des- 
tined for  the  maintenance  of  labor  as  it  lowers  the 
wages  of  labor,  so  it  raises  the  profits  of  stock." 
(Book  I.  Chap.  VIII.)* 

In  these  "  funds  which  are  destined  for  the  pay- 
ment of  wages,"  or  the  "  funds  destined  for  the 
maintenance  of  labor,"  we  undoubtedly  have  that 
"  Wages  Fund  Doctrine"  which,  as  we  shall  see 
later  on,  has  provoked  so  much  just  criticism. 

117.  James   Mill   writes:   "Universally,  then,  we 
may  affirm,  other  things  remaining  the  same,  that 
if  the  ratio  which  capital  and  population  bear  to  one 
another   remains  the   same,  wages  will   remain  the 
same ;  if  the  ratio  which  capital  bears  to  population 
increases,  wages  will  rise ;  if  the  ratio  which  popu- 
lation  bears   to  capital   increases,  wages  will   fall." 
("  Political  Economy,"  p.  44.) 

118.  Ricardo  accepts  this  Doctrine,  but  carries 
the  Argument  a  Step  farther. — In  the  first  place, 
Ricardo  clearly  recognizes  that  the  doctrine  applies 
to  real  and  not  to  nominal  wages.     Speaking  of  a 
general  rise  of  prices,  and  so  of  the  price  of  corn  as 

*  The  recognition  of  this  reciprocal  relation  between  wages 
and  profits  is  usually  regarded  as  originating  with  Ricardo. 
But  nowhere  does  the  latter  give  more  explicit  statement  to 
this  proposition  than  is  found  in  the  above  lines  from  Adam 
Smith. 


234  VALUE   AND   DISTRIBUTION. 

a  result  of  an  influx  of  the  precious  metals,  or  of 
the  abuse  of  banking  privileges,  he  says,  "  It  leaves 
undisturbed,  too,  the  number  of  laborers  as  well  as 
the  demand  for  them ;  for  there  will  be  neither  an 
increase  nor  a  diminution  of  capital.  The  quantity 
of  the  necessaries  to  be  allotted  to  the  laborer  de- 
pends on  the  comparative  demand  and  supply  of 
necessaries,  with  the  comparative  demand  and  sup- 
ply of  labor,  money  being  only  the  medium  in  which 
the  quantity  is  expressed ;  and  as  neither  of  these  is 
altered,  the  real  demand  of  the  laborer  is  not  altered/' 
Again,  Ricardo  follows  the  wages  fund  doctrine 
to  its  legitimate  conclusion,  and  holds  that  wages 
are  only  indirectly  affected  by  the  efficiency  or  prod- 
uctivity of  labor.  In  a  letter  to  Malthus,  written 
in  1815,  he  says,  "  If  instead  of  four,  ten  measures 
of  cloth  could  be  produced  by  a  day's  labor,  no  rise 
would  take  place  in  wages,  no  greater  portion  of 
corn,  cloth,  or  cotton  would  be  given  to  the  laborer, 
unless  a  portion  of  the  increased  produce  were  em- 
ployed as  capital,  and  then  the  rise  in  wages  would 
be  in  proportion  to  the  increased  demand  for  labor, 
and  not  at  all  in  proportion  to  the  increase  in  quan- 
tity of  commodities  produced."  It  is  against  this 
necessary  conclusion  of  the  wages  fund  doctrine  that 
much  of  the  later  and  best  criticism  of  this  doctrine 
has  been  directed.* 

*  We  have  here  availed  ourselves  of  the  excellent  review 
of  the  literature  of  the  subject  in  Taussig's  "  Wages  and 
Capital." 


Till:   WA(JES   FUND   POCTRTNK.  235 

In  so  brief  a  sketch  we  may  safely  ignore  the 
writers  who  defended  this  doctrine  in  the  interval 
between  Hicardo  and  J.  S.  Mill ;  for,  while  it  is  true 
that  McCulloch  is  frequently  spoken  of  as  the  author 
of  the  doctrine,  yet  the  preceding  quotations  from 
Smith,  Ricardo,  and  the  elder  Mill  will  show  how 
utterly  unfounded  is  this  claim. 

II.    THE  LATER  ADVOCATES  AND  CRITICS  OF  THE  THEORY. 

119.  J.  S.  Mill's  Statement  of  the  Theory.— J.  S. 
Mill  writes  :  "  Wages,  then,  depend  mainly  upon  the 
demand  and  supply  of  labor ;  or,  as  it  is  often  ex- 
pressed, on  the  proportion  between  population  and 
capital.  By  population  is  here  meant  the  number 
only  of  the  laboring  class,  or,  rather,  of  those  who 
work  for  hire;  and  by  capital,  only  circulating  capital, 
and  not  even  the  whole  of  that,  but  the  part  which 
is  expended  in  the  direct  purchase  of  labor.  .  .  . 

"  With  these  limitations  of  the  terms,  wages  not 
only  depend  on  the  relative  amount  of  capital  and 
population,  but  cannot,  under  the  rule  of  competition, 
be  affected  by  anything  else.  Wages  (meaning,  of 
course,  the  general  rate)  cannot  rise  but  by  an  in- 
crease of  the  aggregate  funds  employed  in  hiring 
laborers  or  a  diminution  in  the  number  of  compet- 
itors for  hire  ;  nor  fall,  except  either  by  a  diminu- 
tion of  the  funds  devoted  to  paying  labor  or  by  an' 
increase  in  the  number  of  laborers  to  be  paid." 
(Book  II.  Chap.  XI.) 

It  should  be  noted  that  in  this  last  paragraph  Mill 


236  VALUE   AND  DISTRIBUTION. 

bases  the  wages  fund  doctrine  upon  the  general  law 
of  supply  and  demand;  wages  "  under  the  rule  of 
competition"  cannot  be  affected  by  anything  but  the 
relative  amount  of  capital  and  population,  the  former 
being  the  demand  for  and  the  latter  the  supply  of 
this  commodity. 

(a)  MILL'S  CONTENTION  THAT  TRADES  UNIONS 
CANNOT  INCREASE  WAGES.  —  It  will  be  necessary  to 
quote  one  more  passage  from  Mill  if  we  are  to  under- 
stand the  very  interesting  controversy  that  took  place 
between  this  writer  and  W.  T.  Thornton.  After  ex- 
pressing sympathy  with  labor  organizations  Mill  con- 
tinues :  "  They  might  doubtless  succeed  in  diminish- 
ing the  hours  of  labor  and  obtaining  the  same  wages 
for  less  work,  but  if  they  aimed  at  obtaining  actually 
higher  wages  than  the  rate  fixed  by  demand  and 
supply,  the  rate  which  distributed  the  whole  circu- 
lating capital  of  the  country  among  the  entire  work- 
ing population,  this  could  only  be  accomplished  by 
keeping  a  part  of  their  number  permanently  out  of 
employment."  *  In  other  words,  it  follows  as  a  neces- 
sary conclusion  from  the  premises  of  the  Wages  Fund 
Doctrine  that  Trades  Unions  are  powerless  to  im- 
prove the  condition  of  the  laborer  by  raising  his 
wages.  It  was  this  necessary  conclusion  that  pro- 
voked Thornton's  able  and  incisive  criticism.f 

With  this  criticism  and  Mill's  practical  acceptance 


*  Book  Y.  Chap.  X.  Sec.  V. 
Wm.  Thomas  Thornton  "  On  Labor. 


THE   WAGES  FUND  DOCTRINE.  237 

of  Thornton's  conclusions  we  have  now  to  deal.  It 
is  sometimes  said  that  Mill,  in  the  latter  part  of  his 
life,  had  become  so  imbued  with  the  ideas  of  the 
socialist  writers  that  his  defence  of  the  old  ortho- 
dox economics  had  been  greatly  weakened.  This  is 
supposed  to  explain  his  hasty  abandonment  of  the 
Wages  Fund  Doctrine  as  a  result  of  Thornton's  at- 
tack. In  the  present  review  of  this  most  interesting 
movement  in  economic  theory  we  hope  to  show  how 
utterly  hopeless  a  case  Mill  had  to  defend,  and  how 
able  a  champion  there  was  on  the  other  side  of  the 
question. 

120.  Longe's  Criticism  of  Mill. — This  writer  (Fran- 
cis D.  Longe,  barrister)  published  in  1866  "  A  Refu- 
tation of  the  Wages  Fund  Doctrine"  three  years 
before  Thornton  published  his  book  "  On  Labor, 
etc."  This  sudden  interest  in  the  Wages  Fund  Doc- 
trine was  undoubtedly  due  to  that  growing  activity 
of  the  trades  unions  which  resulted  in  the  great  com- 
mission of  1867.  It  was,  of  course,  clearly  seen  that 
if  the  Wages  Fund  Doctrine  was  sound,  then  the  at- 
tempts of  the  unions  to  raise  wages  was  worse  than 
useless.  It  was  undoubtedly  this  necessary  conclu- 
sion that  provoked  the  vehement  attacks  upon  the 
doctrine  which  appeared  at  this  time. 

Longe  held  that  the  Wages  Fund  Doctrine  fails, 
first,  because,  as  a  matter  of  fact,  there  is  no  distinct 
fund  which  is  definitely  set  apart  for  the  payment  of 
wages,  and,  secondly,  because  the  doctrine  rests  upon 
a  wrong  notion  of  the  part  played  by  supply  and  de- 


238  VALUE   AND   DISTRIBUTION. 

mand  in  the  determination  of  price.  But  as  our  space 
is  limited,  and  as  these  contentions  find  much  clearer 
statement  in  Thornton's  book,  it  will  be  well  to  re- 
strict ourselves  to  a  review  of  that  writer's  contri- 
bution. 

121.  Thornton's  Theory  of  Price  and  Wages. — 
Thornton's  attack  was  not,  as  is  frequently  stated, 
primarily  directed  against  Mill's  occasional  lapse 
from  real  to  nominal  wages,  for  Thornton  himself 
was  not  always  clear  upon  this  point.  The  thesis 
which  Thornton  sought  to  establish  was  that  laborers, 
by  combining,  may  exercise  a  monopoly  influence  and 
so  raise  the  rate  of  wages.  In  his  development  of 
this  thesis  he  goes  at  once  to  the  root  of  the  whole 
question  and  denies  Milts  fundamental  contention  that 
"the  rate  of  wages  or  the  price  of  any  other  commodity 
is  necessarily  fixed  by  demand  and  supply" 

While  Thornton  is  not  altogether  happy  in  his  use 
of  terms,  there  can  be  no  doubt  about  the  soundness 
of  his  main  argument.  Stated  very  briefly  and  in 
modern  terms,  this  argument  is  found  to  be  practi- 
cally the  same  as  that  developed  in  the  fifth  chapter 
of  the  present  volume.  The  utility  of  a  good  to  the 
consumer  and  producer,  or  the  demand  and  supply, 
to  use  the  older  terms,  only  establish  limits  within 
which  the  price  may  vary.  The  point  within  these 
limits  at  which  the  price  is  actually  fixed  depends 
upon  the  relative  monopoly  strength  of  buyer  and 
seller,  and  so  is  incapable  of  reduction  under  an  exact 
law.  In  developing  this  thesis  Thornton  shows  that 


THE   WAGES  FUND   DOCTRINE.  239 

the  relation  between  the  supply  and  demand  may 
vary  without  a  corresponding  variation  in  the  price 
of  the  commodity. 

Thornton's  statement  of  the  case  is  as  follows: 
"  We  have  in  the  first  place  to  observe  that  there  are 
two  opposite  extremes, — one  above  which  the  price 
of  a  commodity  cannot  rise,  the  other  below  which  it 
cannot  fall.  The  upper  of  these  limits  is  marked  by 
the  utility,  real  or  supposed,  of ^ the  commodity  to  the 
consumer  ;  the  lower,  its  utility  to  the  dealer. "  (Page 
58.)  That  the  price  will  be  greater  or  less,  according 
as  the  seller  or  the  buyer  is  in  the  best  position  to 
take  advantage  of  the  other's  necessities,  is  clearly 
indicated  in  the  following  passage :  "  Sometimes  it 
is  the  buyer  or  employer  who,  although  greatly  in 
need  of  labor,  yet  needing  it  less  than  the  laborer 
needs  employment,  can  better  afford  to  wait,  and  can 
thereby  artificially  (or  artfully,  if  you  prefer)  dimin- 
ish or,  more  properly  speaking,  conceal  demand. 
Sometimes  it  is  the  laborer  who  can  best  afford  to 
wait,  and  who,  in  like  manner,  has  artifices  at  his 
command  by  which  he  can  lessen  supply,  etc." 
Again  Thornton  writes  :  "  The  relations  between  sup- 
ply and  demand  might  vary  without  being  accom- 
panied or  followed  by  variations  in  price,  while,  on 
the  other  hand,  price  might  vary  without  any  con- 
comitant or  antecedent  variations  of  supply  and  de- 
mand." (Page  57.)  The  marginal  concepts  also  find 
some  possible  recognition  in  passages  like  the  follow- 
ing:  "Competition  does,  indeed,  always  depend  upon 


240  VALUE   AND   DISTRIBUTION. 

the  estimate  of  the  probable  supply  and  demand 
formed  by  those  dealers  who  rate  lowest  the  probable 
proportion  of  demand  to  supply. "  (Page  64.) 

In  the  development  of  his  thesis  Thornton  shows 
by  concrete  illustrations  that  his  law  of  price  is  true 
for  the  market  price  of  general  commodities,  and 
likewise  for  wages  or  the  price  of  labor.  "  Speaking 
generally,  we  may  no  doubt  say,  with  perfect  accu- 
racy, that  the  price  of  labor  is  determined  by  the 
same  general  cause  as  the  price  of  any  other  salable 
commodity.  In  no  case  whatever  is  it  immediately 
dependent  upon  supply  and  demand."  (Page  66.) 

In  brief,  then,  Thornton  held  that  in  the  case  of 
labor,  as  of  every  other  commodity,  price  is  not  fixed 
in  an  exact  way  by  supply  and  demand,  or,  to  use 
more  modern  terms,  by  its  marginal  utility  to  seller 
and  buyer.  These  only  establish  limits  within  which 
the  price  may  vary,  the  price  being  finally  deter- 
mined at  some  point  within  these  limits  by  the  rela- 
tive monopoly  strength  of  seller  and  buyer.  It  follows 
from  this,  and  we  here  have  the  thesis  that  Thornton 
set  out  to  establish,  that  laborers  by  combining  or 
by  increasing  their  monopoly  strength  may  increase 
their  wages.  If  this  is  true,  then  there  can  be  no 
fixed  wages  fund  the  exact  amount  of  which  must  be 
expended  in  wages. 

"Nine-tenths  of  the  confusion  and  obscurity/* 
writes  Thornton,  "  in  which  the  doctrine  of  price  has 
hitherto  been  involved  has  arisen  from  searching 
after  the  unsearchable,  from  seeking  for  some  invari- 


THE  WAGES  FUND  DOCTRINE.  241 

able  rule  for  inevitable  variations,  from  straining  after 
precision  where  to  be  precise  is  necessarily  to  be  wrong. 
Supply  and  demand  are  commonly  spoken  of  as  if 
they  together  formed  some  nicely  fitting,  well-balanced, 
self-adjusting  piece  of  machinery,  whose  component 
parts  could  not  alter  their  mutual  relations  without 
evolving,  as  the  product  of  every  change,  a  price 
exactly  corresponding  with  that  particular  change. 
Price,  and  more  especially  the  price  of  labor,  is 
scarcely  ever  mentioned  without  provoking  a  refer- 
ence to  the  '  inexorable/  the  '  immutable,'  the  t  eter- 
nal' laws  by  which  it  is  governed ;  to  laws  which, 
according  to  my  friend  Professor  Fawcett,  '  are  as 
certain  in  their  operation  as  those  which  control 
physical  nature.'  It  is  no  small  gain  to  have  dis- 
covered that  no  such  despotic  laws  do  or  can  exist  ; 
that,  inasmuch  as  the  sole  function  of  scientific  law 
is  to  predict  the  invariable  recurrence  of  the  same 
effect  from  the  same  causes,  and  as  there  can  be  no 
invariability  where — as  in  the  case  of  price — one  of 
the  most  efficient  causes  is  that  ever-changing  cha- 
meleon, human  character  or  disposition,  price  cannot 
possibly  be  subjected  to  law"  (Page  65.) 

122.  The  Importance  of  Thornton's  Theory  of 
Price  not  generally  recognized. — So  far  as  I  know, 
the  great  importance  of  Thornton's  discussion  of  the 
general  theory  of  price  has  never  been  fully  recog- 
nized. Even  so  eminent  an  economist  as  -F.  "W. 
Taussig,  writing  as  late  as  1896,  has  failed  to  see 
the  fundamental  point  made  by  Thornton.  Taussig 

10 


242  TALUE  AND  DISTRIBUTION. 

writes :  "  We  need  not  follow  the  intricacies  of  his 
[Thornton's]  reasoning  about  supposed  cases  of  horses 
at  one  price  and  another,  of  corn  and  gloves,  Dutch 
auctions,  and  so  on.  With  the  application  of  the 
principle  of  marginal  utility  this  whole  phase  of 
economic  theory  has  become  simplified.  Mill's  equa- 
tion of  demand  and  supply  is  stated  in  better  terms, 
and  with  fuller  consideration  of  all  the  elements  in- 
volved in  the  now  familiar  proposition  that  price 
depends  on  marginal  utility.  Mill  himself,  in  admit- 
ting the  justice  of  some  of  Thornton's  criticisms, 
pointed  out  that  one  important  condition  had  not 
been  mentioned  in  the  Political  Economy,  which  yet 
must  be  present  if  the  equation  of  demand  and  sup- 
ply is  to  fix  price  at  a  definite  point.  Quantity  de- 
manded must  vary  with  price  continuously.  The 
same  condition,  it  is  clear,  must  be  present  if  the 
modern  version  of  the  law  of  demand  and  supply  is 
to  bring  a  determinate  answer.  If  marginal  utility 
is  to  fix  price  without  a  range  of  possible  variation, 
each  added  increment  of  the  article  offered  must  have 
a  less  utility  than  the  portion  preceding  it.  These 
are  now  commonplaces ;  they  make  Thornton's  dis- 
cussion antiquated  and  leave  Mill's  significant  only 
as  showing  that,  on  topics  which  he  had  stopped  to 
think  over  with  care,  he  reasoned  with  severe  ac- 
curacy." (The  italics  are  mine.)  ("Wages  and  Cap- 
ital, p.  251.) 

When  Taussig  dismisses  "the  cases  of  horses  at 
one  price  and  another"  with  such  scant  courtesy,  and 


THE  WAGES  FUND  DOCTRINE.  243 

when  he  says  that  "this  whole  phase  of  economic 
theory"  finds  much  simpler  statement  in  terms  of 
marginal  utility,  he  seems  to  have  missed  the  essen- 
tial point  in  Thornton's  contention.  For  if  Thorn- 
ton had  been  familiar  with  the  modern  doctrine  of 
marginal  .utility  he  would  have  insisted  that  mar- 
ginal utility  does  not  determine  price  except  in  the 
rare  case  of  normal  value. 

Again,  are  we  told  that  Mill,  in  his  reply  to  Thorn- 
ton, pointed  out  the  fact  that  the  theory  of  price  set 
forth  in  the  "  Political  Economy"  is  only  true  under 
the  assumption  that  "  Quantity  demanded  must  vary 
with  price  continuously."  From  this  Taussig  con- 
cludes that  "  on  topics  which  he  [Mill]  had  stopped 
to  think  over  with  care  he  reasoned  with  severe  ac- 
curacy." Now,  I  would  ask,  is  this  entirely  fair  to 
Thornton  ?  for  this  latter  writer  has  repeatedly  called 
attention  to  this  assumption,  as  in  the  above  itali- 
cized passages.  Indeed,  his  whole  argument  against 
the  then  accepted  theory  of  price  was  based  upon  the 
contention  that  this  condition  is  not  generally  real- 
ized in  the  markets  of  the  world.  Mill  believed  that 
this  assumption  was  generally  realized  in  the  price 
of  commodities,  for  he  held  that  "  scarcity  goods  are 
rather  conceivable  than  actually  existing."  Thorn- 
ton, on  the  other  hand,  took  the  more  modern  view 
and  recognized  the  general  prevalence  of  scarcity 
goods,  and  is  thus  led  to  conclude  that  the  quantity 
demanded  does  not  vary  with  the  price  continuously. 

And  so  while  Mill  thought  that  the  old  theory 


244  VALUE  AND  DISTRIBUTION. 

might  be  pieced  out  by  the  discovery  of  some  "  sup- 
plementary law,"  Thornton  held  that  "  price  cannot 
possibly  be  subjected  to  law,"  and  this  for  the  reason 
that  in  last  resort  general  prices  depend  upon  the 
relative  monopoly  strength  of  buyer  and  seller.  In 
view  of  this  it  must,  I  think,  be  admitted  that  it  is 
Thornton  who  reasoned  with  severe  accuracy,  and 
that  his  reasoning  has  made  antiquated  not  only 
Mill's  discussion,  but  much  of  the  discussion  of  the 
Austrian  economists  as  well. 

It  is  more  than  probable  that  the  present  writer 
would  likewise  have  missed  the  point  raised  by 
Thornton  if  he  had  not  worked  out  this  same  thesis, 
in  Part  I.  of  the  present  volume,  some  years  before 
his  reading  of  Thornton  "  On  Labor."  Thornton, 
however,  approaches  the  question  inductively,  while 
in  my  discussion  the  accent  is  thrown  upon  the  de- 
ductive argument,  for  the  contention  that  "  demand 
varies  with  price  continuously"  is  found  to  rest  in 
last  resort  upon  the  assumption  of  absolutely  free 
competition  on  the  side  of  the  consumers.  An  as- 
sumption that  has  no  greater  warrant  than  that 
which  lies  back  of  Bicardian  economics,  to  wit : 
that  competition  is  absolutely  free  on  the  side  of  the 
producers. 

123.  One  Source  of  Confusion  in  Thornton's  Dis- 
cussion.— This  writer  clearly  recognizes,  as  we  have 
seen,  that  supply  and  demand,  or  marginal  utility  to 
buyer  and  marginal  utility  to  seller,  only  establish 
limits  within  which  the  price  may  vary.  He  also  rec- 


THE  WAGES  FUND  DOCTRINE.  245 

ognizes  that  the  final  determination  depends  upon 
the  relative  monopoly  strength  of  buyer  and  seller, 
for  he  has  written :  "  Sometimes  it  is  the  buyer  or 
employer  who,  although  greatly  in  need  of  labor, 
yet  needing  it  less  than  the  laborer  needs  employ- 
ment, can  better  afford  to  wait,  and  can  thereby  arti- 
ficially (or  artfully  if  you  prefer)  diminish  or,  more 
properly  speaking,  conceal  demand.  Sometimes  it  is 
the  laborer  who  can  best  afford  to  wait,  and  who  in 
like  manner  has  artifices  at  his  command  by  which 
he  can  lessen  supply,"  etc.  Moreover,  Thornton 
does  not  regard  this  as  peculiar  to  the  wages  of 
labor,  but  holds  that  it  is  true  of  the  market  prices 
of  general  commodities. 

Elsewhere,  however,  Thornton  tells  us  that  supply 
and  demand  dot  no  "  affect  price,  except  indirectly, 
and  by  their  influence  on  competition,  which,  and 
which  alone,  is  the  immediate  arbiter  of  price."  (Page 
64.)  Again,  he  writes,  "  Wherever  competition  is 
permitted  to  act  without  restriction,  he  will  find  that 
the  price  may  vary  exceedingly  without  the  smallest 
variation  in  the  relations  of  supply  and  demand ; 
and  he  will  also  find  that  there  cannot  be  the  smallest 
variation  in  the  price  without  a  previous  and  corre- 
sponding variation  in  competition,  which,  therefore, 
he  will,  in  the  cases  examined,  be  constrained  to 
recognize  as  the  price's  determining  cause."  (Page 
69.)  This  contention  that  competition  is  the  ultimate 
determining  cause  of  price  certainly  seems  to  conflict 
with  the  first  contention,  that  price  depends  upon  the 


246  VALUE  AND  DISTRIBUTION. 

artificial,  artful,  or  monopoly  control  of  the  supply  of 
and  demand  for  a  commodity. 

This  confusion  in  his  thought  is  brought  out  even 
more  distinctly  in  a  foot-note  on  page  69  :  "  This, 
in  speaking  of  tangible  commodities,  seems  to  me  a 
more  accurate  as  well  as  a  simpler  way  of  stating 
the  case  than  to  say  that  the  competition  of  dealers 
makes  price  fall,  and  that  competition  of  customers 
makes  it  rise.  What  the  latter  competition  seems 
to  me  really  to  do  is  to  show  the  dealers  that  a 
higher  price  than  they  previously  supposed  is  attain- 
able, and  to  induce  them  consequently  to  relax  their 
own  competition  so  as  to  obtain  it." 

Thornton  here  follows  the  earlier  economists  and 
apprehends  very  clearly  and  strongly  the  competition 
among  producers  or  sellers,  and  that  this  results 
in  a  declining  price.  When,  however,  he  turns  to 
the  phenomenon  of  advancing  price  his  contention 
that  competition  is  the  final  determinant  of  price 
compels  him  to  recognize  competition  among  buyers 
or  consumers  as  the  cause  of  this  advance.  But 
the  inherited  tendency  to  associate  competition  with 
falling  prices  asserted  itself,  and  he  concludes  that 
competition  among  buyers  does  not  directly  affect 
prices,  but  only  shows  that  a  higher  price  may  be 
obtained,  and  this  induces  the  sellers  "  to  relax  their 
own  competition  so  as  to  obtain  it."  Or  he  here 
contends  that  in  the  case  of  advancing  prices  it  is 
not  competition  but  the  relaxing  of  competition  that 
determines  price.  In  other  words,  that  it  is  the 


THE  WAGES  FUND  DOCTRINE.  247 

artificial,  artful,  or  monopoly  control  of  the  supply 
by  the  sellers  that  is  here  the  ultimate  determinant 
of  price.  The  explanation  of  this  difficulty  is  readily 
found.  We  usually  think  of  monopoly  as  absolutely 
controlling  the  supply.  As  a  matter  of  fact,  neither 
competition  nor  monopoly  is  absolute  on  either  side, 
hence  the  phenomena  may  be  described  either  in 
degrees  of  competition  or  in  degrees  of  monopoly, 
just  as  we  might  say  either  that  we  have  so  many 
degrees  of  heat  or  so  many  degrees  of  cold.  We 
tend,  however,  to  associate  competition  with  the  con- 
cept of  free  competition  or  with  normal  price,  and 
to  apply  the  term  monopoly  to  every  departure  from 
normal  conditions.  It  may,  therefore,  save  some 
confusion  if  we  abandon  Thornton's  contention  that 
competition  is  the  final  determinant  and  say,  as  I 
have  done,  that  marginal  utility  and  marginal  dis- 
utility only  fix  the  limits  within  which  the  price 
may  vary,  and  that  the  point  at  which  the  price 
is  finally  fixed  depends  upon  the  relative  monopoly 
strength  of  buyer  and  seller. 

124.  There  is  no  Fund  set  apart  for  the  Payment 
of  Wages. — In  a  foot-note  on  pages  84,  85,  Thorn- 
ton approaches  the  question  in  a  less  didactic  way, 
and,  as  this  is  the  part  of  his  argument  most  fre- 
quently referred  to,  it  may  be  well  to  reproduce  it 
at  some  length.  He  writes : 

"What  makes  mischievous  fallacies  doubly  mis- 
chievous is  their  incorrigible  propensity  to  propagate 
their  species.  Only  allow  them  a  little  time  to  settle, 


248  VALUE   AND   DISTRIBUTION. 

and  they  are  sure  to  swarm  like  bees.  Of  course, 
so  inveterate  a  fallacy  as  the  popular  theory  of  sup- 
ply and  demand  could  not  fail  to  have  a  numerous 
offspring,  which  may  accordingly  be  seen  cropping 
up  in  a  variety  of  shapes  in  every  direction.  Among 
the  most  unmistakable  of  its  progeny  is  a  certain 
imaginary  '  wage  fund ;'  on  the  proportion  between 
the  amount  of  which,  and  the  quantity  of  labor  in 
the  country,  the  price  of  labor  or  rate  of  wages  is 
sometimes  declared  to  depend.  On  this  subject  an 
excellent  friend  of  mine,  and  an  excellent  economist 
to  boot,  speaks  as  follows  in  a  very  interesting  little 
volume  which  he  has  lately  published  :  '  The  circu- 
lating capital  of  a  country  is  its  wage  fund.  Hence, 
if  we  desire  to  calculate  the  average  money  wages 
received  by  each  laborer,  we  have  simply  to  divide 
the  amount  of  capital  by  the  number  of  the  labor- 
ing population.  It  is,  therefore,  evident  that  the 
average  money  wages  cannot  be  increased  unless 
either  the  circulating  capital  is  augmented  or  the 
number  of  the  laboring  population  is  diminished/ 
(Faweett's  '  Economic  Position  of  the  British  La- 
borer,' p.  120.)  It  is  due  to  Professor  Fawcett's 
high  and  deserved  reputation  to  explain  that,  in 
saying  this,  he  is  apparently  repeating,  without 
much  reflection,  what  has  often  been  said  before 
by  MacCulloch  and  others  of  equal  eminence  among 
his  predecessors.  What,  however,  does  his  and 
their  language  mean?  Evidently  nothing  less  than 
this,  that  there  is  a  certain  national  fund,  the  whole 


THE  WAGES  FUND  DOCTRINE.  249 

of  which  must  necessarily  be  applied  ('  destined' 
was  MacCulloch's  favorite  word)  to  the  payment 
of  wages.  But,  is  there  really  any  such  fund  ?  If 
there  be,  it  can  only  be  an  aggregate  of  smaller 
funds  of  the  same  kind  possessed  by  the  several 
individuals  composing  the  nation.  But  has  any 
individual  any  such  fund?  Is  there  any  specific 
portion  of  any  individual's  capital  which  the  owner 
must  necessarily  expend  upon  labor?  Of  course, 
there  is  a  certain  amount  which  every  effectual  em- 
ployer can  afford  to  spend  upon  labor,  as  also  there 
is  in  every  instance  a  certain  limit  to  that  amount 
which  cannot  possibly  be  expended.  But  must  the 
amount,  so  limited,  which  is  thus  applicable  to  the 
purchase  of  labor,  be  necessarily  so  applied  ?  Does 
any  farmer  or  manufacturer  or  contractor  ever  say 
to  himself,  '  I  can  afford  to  pay  so  much  for  labor ; 
therefore,  for  the  labor  I  hire,  whatever  the  quantity 
be,  I  will  pay  so  much'  ?  Does  he  not  rather  say, '  So 
much  labor  I  require,  so  much  is  the  utmost  I  can 
afford  to  pay  for  it,  but  I  will  see  for  how  much  less 
than  the  utmost  I  can  afford  to  pay  I  can  get  all  the 
labor  I  require'  ?  But  if  there  thus  be  no  wage  fund 
which  any  single  employer  is  bound  to  distribute 
among  laborers,  evidently  there  can  be  no  aggregate 
fund  which  the  whole  body  of  employers  is  bound 
so  to  distribute ;  evidently,  therefore,  there  can  be  no 
national  wage  fund,  division  of  which  by  the  whole 
number  of  laborers  seeking  employment  will  show 
the  average  rate  of  wages  they  will  obtain." 


250  VALUE   AND   DISTRIBUTION. 

125.  Mill's  Reply  to  Thornton. — Mill  replied  to 
Thornton  in  the  Fortnightly  Review,  May,  1869. 
He  there  admitted  that  there  are  cases  where  supply 
and  demand  do  not  accurately  determine  price,  and 
that  there  is,  therefore,  some  supplementary  law  yet 
to  be  developed.  He  writes :  "  Whoever  can  teach 
us  the  supplementary  law  makes  a  valuable  addition 
to  the  scientific  theory  of  the  subject."  But  in  this 
very  admission  Mill  betrays  his  utter  failure  to  ap- 
preciate the  point  that  Thornton  had  made, — namely, 
that  the  conditions  fixing  the  price  at  some  point 
within  the  limits  established  by  supply  and  demand 
are  so  indeterminate  as  to  be  incapable  of  reduc- 
tion under  any  exact  law.  (See  Section  121  of 
present  volume.) 

After  admitting  that  in  a  few  exceptional  cases  of 
general  commodities  Thornton's  contention  holds 
good,  Mill  turns  to  the  question  of  wages  and  in- 
quires whether  Thornton's  contention  holds  good  in 
this  connection.  Mill  writes:  "It  will,  of  course,  be 
said  that  these  speculations  are  idle,  for  labor  is  not 
in  that  barely  possible  excepted  case.  Supply  and 
demand  do  not  entirely  govern  the  price  obtained  for 
labor.  The  demand  for  labor  consists  of  the  whole 
circulating  capital  of  the  country,  including  what  is 
paid  in  wages  for  unproductive  labor.  The  supply  is 
the  whole  laboring  population.  If  the  supply  is  in 
excess  of  what  the  capital  can  at  present  employ, 
wages  must  fall.  If  the  laborers  are  all  employed 
and  there  is  surplus  capital  still  unused,  wages  will 


THE  WAGES  FUND  DOCTRINE.  251 

rise.  This  series  of  deduction  is  generally  received 
as  incontrovertible.  They  are  found,  I  presume,  in 
every  systematic  treatise  on  Political  Economy,  my 
own  certainly  included.  I  must  plead  guilty  to 
having,  along  with  the  world  in  general,  accepted 
the  theory  without  the  qualifications  and  limitations 
necessary  to  make  it  admissible. 

"  The  theory  rests  on  what  may  be  called  the  doc- 
trine of  the  wages  fund.  There  is  supposed  to  be,  \  . 
at  any  given  instant,  a  sum  of  wealth  which  is  un- 11  V 
conditionally  devoted  to  the  payment  of  the  wages  l» 
of  labor.  This  sum  is  not  regarded  as  unalterable, 
for  it  is  augmented  by  saving  and  increases  with  the 
progress  of  wealth ;  but  it  is  reasoned  upon  as  being 
at  any  given  moment  a  predetermined  amount. 
More  than  that  amount  it  is  assumed  that  the  wages- 
receiving  class  cannot  possibly  divide  among  them ; 
that  amount,  and  no  less,  they  cannot  but  obtain.  So 
that,  the  sum  to  be  divided  being  fixed,  the  wages  of 
each  depends  solely  upon  the  devisor, — the  number  of 
participants.  In  this  doctrine  it  is  by  implication 
affirmed  that  the  demand  for  labor  not  only  increases 
with  the  cheapness,  but  increases  in  exact  proportion 
to  it ;  the  same  aggregate  sum  being  paid  for  labor 
whatever  its  price  may  be/'  (Page  515.)  Mill  then 
asks,  "  But  is  there  such  a  thing  as  a  wages  fund,  in 
the  sense  here  implied?  Exists  there  any  fixed 
amount  which,  and  neither  more  nor  less  than  which, 
is  destined  to  be  expended  in  wages?"  (Page  516.) 
His  answer  to  this  question  is  in  the  negative. 


252  VALUE  AND  DISTRIBUTION. 

"  There  is  no  law  of  nature  making  it  inherently 
impossible  for  wages  to  rise  to  the  point  of  absorbing 
not  only  the  fund  which  he  (employer)  had  intended 
to  devote  to  carrying  on  his  business,  but  the  whole 
of  what  he  allows  for  his  private  expenses,  beyond 
the  necessaries  of  life.  The  real  limit  to  the  rise  is 
the  practical  consideration,  how  much  would  ruin 
him  or  drive  him  to  abandon  the  business ;  not  the 
inexorable  limit  of  the  wages  fund."  (Page  516.) 

It  is  interesting  to  note  that  Mill  here  goes  down 
before  an  argument  which  Thornton  regarded  as  so 
unimportant  that  he  committed  it  to  a  foot-note. 
The  theory  of  price  to  which  Thornton  devoted  much 
space,  and  which  was  his  most  important  contribution 
to  economic  theory,  Mill  dismisses  as  true  of  a  few 
barely  possible  cases.  The  reason  for  this  failure  to 
recognize  the  importance  of  Thornton's  contention  is 
found  in  the  fact  that  Mill  continued  to  think  of 
scarcity  goods  as  rather  conceivable  than  actually 
existing. 

126.  Wages  are  affected  by  the  Productivity  of 
Labor. — Again,  it  might  be  urged  that  the  wages 
fund  doctrine  leads  us  inevitably  to  the  conclusion 
reached  by  Ricardo, — namely,  that  wages  are  only  in- 
directly affected  by  the  efficiency  or  productivity  of 
labor.  Now,  since  in  the  case  of  all  other  commodi- 
ties the  price  tends  to  vary  with  the  efficiency  or 
utility  of  the  commodity,  a  theory  of  wages  which 
contravenes  this  experience  is  at  least  open  to  serious 
suspicion.  Again,  when  we  remember  that  capital 


THE  WAGES  FUND  DOCTRINE.  253 

may  be  invested  either  in  machines  or  in  the  wages  of 
laborers,  it  becomes  manifest  that  the  amount  sever- 
ally devoted  to  these  competing  interests  will  depend 
on  their  relative  efficiency ;  where  wages  are  higher 
relatively  to  the  efficiency  of  labor,  there  will  be  a 
corresponding  increase  in  the  capitalistic  methods  of 
production.  In  other  words,  more  capital  will  be 
invested  in  machines  and  less  in  men.  If,  however, 
the  efficiency  of  labor  is  increased,  more  capital  will 
be  determined  to  labor,  and  wages  will  rise.*  Nor  do 
we  successfully  avoid  this  criticism  by  confining  our 
wages  fund  to  the  capital  dedicated  to  the  payment 
of  labor,  for  this  fund  is,  manifestly,  indeterminate, 
since  it,  too,  must  vary  with  the  relative  efficiency  of 
men  and  machines.  The  best  review  of  this  phase  of 
the  question  will  be  found  in  "  A  Critique  of  Wage 
Theories/'  by  Dr.  Stuart  Wood,  which  was  published 
in  the  "  Annals  of  the  American  Academy." 

127.  Cairnes's  Attempt  to  rehabilitate  the  Doc- 
trine.— Cairne's,  who  sought  to  rehabilitate  the  wages 
fund  doctrine,  added  but  little  to  this  part  of  the 
discussion.  He  admitted  Thornton's  contention  that 
within  certain  limits  the  laborers  might  by  combina- 
tion increase  their  wages.  He,  however,  urged  that 

*  In  keeping  with  this,  the  high  wages  in  the  United  States 
have  compelled  a  more  general  use  of  machinery  than  pre- 
vails elsewhere ;  but  the  fact  that  capitalistic  methods  are 
more  generally  adopted  in  the  United  States  may  indicate 
that  the  difference  in  xvages  exceeds  the  difference  between 
the  efficiency  of  labor  here  and  in  Europe. 


254  VALUE  AND  DISTRIBUTION. 

if  their  demands  trenched  upon  the  normal  rate  of 
profits  the  inducement  to  save  would  be  lessened, 
capital  would  decrease,  and,  in  the  end,  this  would 
react  upon  the  rate  of  wages.  In  other  words,  he 
held,  and  rightly,  that  there  is  some  necessary  rela- 
tion between  the  supply  of  capital  and  the  supply  of 
labor,  or  that  there  is  a  sense  in  which  it  is  true  that 
wages  can  only  increase  with  the  increase  of  avail- 
able capital.  On  page  271  it  will  be  shown  just 
what  this  necessary  relation  is,  and  we  shall  then 
learn  that  this  relation  is  much  too  complicated  to 
allow  us  to  get  the  rate  of  market  wages  by  a  simple 
process  of  division.  Again,  it  will  be  seen  that  it 
is  only  true  for  normal  wages,  and  so  is  quite  aside 
from  the  problem  which  the  "  wages  fund  doctrine" 
was  supposed  to  solve.  For,  from  Adam  Smith  to 
Taussig,  this  doctrine  has  been  held  to  apply  to  mar- 
ket wages.  The  latter,  for  instance,  writes :  "The 
narrower  question  of  '  market'  wages,  which  is  the 
essence  of  the  wages  fund  doctrine,  etc."  (Note,  p. 
255,  "  Wages  and  Capital.") 

128.  The  Element  of  Truth  in  the  Wages  Fund 
Doctrine. — The  marvellous  vitality  of  this  doctrine, 
the  persistence  with  which  the  ablest  economists  have 
clung  to  it,  is  due,  in  large  part,  to  the  soul  of  truth 
which  it  undoubtedly  contains, — namely,  that,  under 
normal  conditions,  there  is  a  necessary  relation  be- 
tween the  supply  of  capital  and  the  earnings  of 
labor.  If  profits  fall  below  the  normal  rate,  accumu- 
lation ceases  and  laborers  are  forced  to  work  with  less 


THE  WAGES  FUND  DOCTRINE.  255 

efficient  instruments.  But  it  must  be  remembered 
that  this  is  only  true  under  normal  conditions.  The 
wages  fund  doctrine,  therefore,  has  confounded  con- 
fusion by  attempting  to  impose  a  law  upon  market 
prices  that  can  only  be  true  for  normal  prices. 

129.  The  Source  of  the  Confusion. — It  may  be 
well,  before  leaving  this  part  of  the  discussion,  to 
inquire  just  how  or  why  economists  were  betrayed 
into  this  error.  In  answer,  it  may  fairly  be  said, 
that  this  "  wages  fund  doctrine"  was  but  part  of  the 
general  attempt  to  reduce  economic  phenomena  to 
more  simple  and  manageable  terms,  which  character- 
ized the  economics  of  the  earlier  part  of  this  century. 
This  was  done  by  declaring  that  scarcity  values  are 
the  exceptions  and  free  competition  the  rule  in  the 
every-day  industrial  world.  The  simplicity  and  order 
that  this  introduced  amid  the  previous  chaos  marked 
a  great  advance  in  economic  theory,  and  gave  to 
Bicardian  economics  its  clearness  and  vitality.  Nor 
should  it  be  forgotten  that,  in  the  latter  part  of  the  last 
and  the  beginning  of  the  present  century,  the  trend  of 
events  seemed  to  be  in  the  direction  of  free  compe- 
tition. But  in  the  last  half  of  the  present  century 
this  tendency  has  been  reversed,  thus  compelling  us 
to  recognize  the  fact  that  scarcity  values  are  the  rule 
rather  than  the  exception. 


CHAPTER    II. 

THE  RESIDUAL  CLAIMANT  THEORY  OF  WAGES. 

THIS  theory  may  be  briefly  summed  up  as  follows : 
Rent,  interest,  and  profits  are  determined  by  fixed 
definite  laws,  while  wages  are  a  more  or  less  indeter- 
minate share  of  the  social  product.  In  other  words, 
the  receiver  of  wages  is  in  much  the  same  position  as 
the  residual  claimant  to  an  estate, — he  must  wait 
until  all  specific  bequests  have  been  paid,  and  then 
receives  any  balance  that  remains.  This  gives  us  a 
scheme  of  distribution  that  is  much  like  that  which 
was  developed  in  Ricardian  economics.  There  is, 
however,  this  important  difference :  in  the  one  case 
the  residual  claimant  is  the  receiver  of  wages,  while 
in  the  Ricardian  scheme  the  residual  claimant  is  the 
receiver  of  Ricardian  profits. 

130.  Profits  the  Residual  Share  according  to  the 
Earlier  Economists. — In  so  far  as  the  earlier  econo- 
mists troubled  themselves  about  the  problem  of  dis- 
tribution, they  held  that  the  social  product  was  divided 
into  rent,  wages,  and  profit, — the  latter  share  being 
frequently  confounded  with  interest.  We  have  seen, 
in  the  preceding  chapter,  that  Adam  Smith  and 
Ricardo  both  held  that  wages  and  profit  vary  in- 
versely. This  would  seem  to  have  been  based  on  the 
contention  that  rent  being  fixed  by  a  definite  law,  the 

256 


THE  RESIDUAL  CLAIMANT  THEORY  OF  WAGES.       257 

balance  was  divided  between  wages  and  profit ;  hence 
if  one  was  increased  the  other  must  be  diminished. 

While  this  reciprocal  relation  between  wages  and 
profit  is  frequently  insisted  upon  by  Ricardo,  yet 
here  and  there  in  his  writings  we  find  a  very  serious 
modification  of  this  scheme  of  distribution.  For,  ac- 
cording to  Malthus,  normal  wages  are  definitely  fixed 
by  the  cost  of  producing  labor,  and  according  to  the 
"  Wages  Fund  Doctrine"  market  wages  are  definitely 
determined  by  dividing  total  capital  by  total  number 
of  laborers,  while  rent  is  more  or  less  definitely  de- 
termined by  the  Law  of  Rent.  Both  rent  and  wages 
being  thus  determined  by  definite  laws,  it  follows 
that  profit  is  the  balance  left  after  deducting  the 
other  two  shares.  In  other  words,  he  who  secures 
this  third  share  is  in  the  position  of  a  residual  legatee. 
Here,  in  a  very  simple  form,  we  have  a  scheme  of 
distribution  which,  consciously  or  unconsciously,  lies 
back  of  the  whole  Ricardian  system  of  economics. 
Indeed,  it  was  not  until  Cairnes  attempted  to  reha- 
bilitate the  wages  fund  doctrine  that  we  find  a  more 
or  less  conscious  abandoning  of  this  scheme  of  dis- 
tribution. 

131.  Cairnes's  Statement  of  the  Residual  Claim- 
ant Theory  of  Wages. — Cairnes,  as  we  have  seen, 
admitted  Thornton's  claim  that  wages  might  vary 
within  certain  limits.  He,  however,  urged  that  if 
wages  were  so  increased  as  to  cut  in  on  the  normal 
rate  of  profits,  saving  would  be  discouraged,  capital 
would  decrease,  men  would  be  compelled  to  labor 

17 


258  VALUE  AND   DISTRIBUTION. 

with  less  efficient  tools,  and,  hence,  the  wages  of  labor 
would  of  necessity  decline.  Now,  while  there  was 
undoubtedly  much  truth  in  this  contention,  it  was 
clearly  a  repudiation  of  that  system  of  distribution 
which  had  been  accepted  without  question  for  well-r 
nigh  half  a  century.  For,  since  profits  are  here  de- 
termined by  a  law  of  normal  value,  one  might  urge 
that  the  receiver  of  wages  is  then  in  the  position  of 
the  residual  claimant. 

132.  Walker's  Residual  Claimant  Theory  of 
Wages. — The  late  President  Walker,  who  was  the 
first  clearly  to  enunciate  the  "Residual  Claimant 
Theory  of  Wages,"  reached  much  the  same  conclu- 
sion as  Cairnes,  though  by  a  somewhat  different  route. 
He  first  distinguishes  between  the  function  of  the  capi- 
talist and  the  function  of  the  entrepreneur.  Having 
shown  that  entrepreneurs  of  superior  skill  receive  a 
differential  surplus,  like  owners  of  land  of  superior 
fertility,  he  gives  to  this  differential  surplus,  when 
secured  by  the  entrepreneur,  the  name  profit.  This, 
of  course,  gives  us  four  shares  in  distribution, — rent 
of  land ;  interest,  or  the  normal  surplus  which  Cairnes 
had  in  mind ;  profit,  as  defined  by  Walker ;  and  wages. 
The  first  three  of  these  shares  being  determined  by 
definite  laws,  it  seems  to  follow  that  the  laborer  is  in 
the  position  of  the  residual  claimant. 

In  the  1888  edition  of  his  "  Political  Economy" 
Walker  writes :  "It  has  not  been  by  accident,  or 
whim,  or  from  any  notion  respecting  the  compara- 
tive dignity  of  the  several  claimants  to  the  product 


THE   RESIDUAL  CLAIMANT  THEORY  OF  WAGES.        259 

of  industry,  that  rent,  interest,  and  profits  have  been 
discussed  before  wages." 

"  This  order  has  been  followed  for  a  positive  rea- 
son, which  is  that,  in  the  theory  of  distribution  here 
proposed,  wages  equal  the  product  of  industry  minus 
the  three  parts  already  determined  in  their  nature 
and  amount.  In  this  view  the  laboring  class  receive 
all  they  help  to  produce,  subject  to  deduction  on  the 
three  several  accounts  mentioned."  (Page  248.) 

"  These  three  shares  being  cut  off,"  the  product  of 
industry,  the  whole  remaining  body  of  wealth,  daily 
or  annually  created,  is  the  property  of  the  laboring 
class;  their  wages,  or  the  remuneration  of  their 
services."  (Page  250.) 

"  I  have  spoken  of  the  laborer  as  the  residual 
claimant  upon  the  products  of  industry.  That  view 
of  wages  being  new,  even  the  phrase  in  which  I  have 
embodied  it  has  been  excepted  to.  Since  the  first 
edition  of  this  treatise  was  published  certain  writers 
have  declared  that  there  is  no  more  reason  for  apply- 
ing the  term  residual  to  wages  than  for  applying  it 
to  any  other  share  of  the  products  of  industry ;  that 
each  share,  in  turn,  comprises  all  which  the  other 
shares  do  not  include."  (Page  252.) 

"  The  criticism  of  these  writers  is  not  just.  It  is 
competent  to  them  to  controvert  the  view  of  the 
origin  and  measure  of  business  profits  presented  in 
the  last  chapter ;  and,  in  expressing  their  dissent 
therefrom,  they  will,  of  course,  deny  that  wages  con- 
stitute the  residual  share  of  the  product.  But  no 


260  VALUE  AND   DISTRIBUTION-. 

one  can  properly  make  question  that,  if  this  view  of 
business  profits  be  accepted,  as  correctly  setting  forth, 
in  the  large  way,  the  facts  of  industry,  not  only  is 
what  is  manifestly  meant  by  the  phrases  residual 
claimant,  residual  share,  completely  true,  but  also 
that  those  phrases  themselves  are  perfectly  accurate 
in  the  expression  of  that  meaning."  (Page  253.) 

"  Upon  the  theory  of  profits  which  has  been  ex- 
pounded, the  remuneration  of  labor,  wages,  is  strictly 
the  residual  share  of  the  product  of  industry ;  residual 
in  this  sense,  that  it  is  enhanced  by  every  cause, 
whatever  that  may  be,  which  increases  the  product 
of  industry  without  giving  to  any  one  of  the  other 
three  parties  to  production  a  claim  to  an  increased 
remuneration,  under  the  operation  of  the  principle 
already  stated ;  residual  in  the  sense  that,  even  if 
any  one  or  all  of  the  other  parties  to  production  be- 
come so  engaged  in  any  given  increase  of  the  product 
as  to  become  entitled  to  an  enhanced  share  in  its  dis- 
tribution, their  shares  will  remain  subject  to  deter- 
mination by  positive  reasons,  while  wages  receives 
the  benefit  of  all  that  is  left  after  the  other  claimants 
are  satisfied."  (Page  253.) 

133.  Criticism  of  Walker's  Theory. — In  attempt- 
ing any  criticism  of  this  theory  of  wages,  it  should  be 
remembered  that,  like  Thornton's  effort,  it  was  a  pro- 
test against  the  "  Wages  Fund  Doctrine."  Thornton's 
protest,  however,  was  principally  directed  against  a 
conclusion  to  which  that  doctrine  inevitably  led,— 
namely,  that  all  attempts  of  labor  to  improve  its 


THE  RESIDUAL   CLAIMANT  THEORY   OF  WAGES.        261 

condition  by  combining  in  Trades  Unions,  etc.,  are 
utterly  futile.  Thornton  refuted  this  contention  by 
showing  that  labor,  like  any  other  commodity,  may 
have  a  scarcity  or  monopoly  value.  Now,  it  is  in- 
teresting to  note  that  one  of  the  first  criticisms  of 
Walker's  "  Residual  Claimant  Theory"  was  to  the 
effect  that,  like  the  "  Wages  Fund  Doctrine,"  it  leads 
to  the  conclusion  that  no  combination  of  labor  can 
help  the  condition  of  the  laboring  class.  For,  if  the 
laborer  is  a  residual  claimant,  then  it  must  be  true  of 
him  as  of  the  residual  legatee  of  an  estate,  that  he  is 
powerless  to  increase  or  decrease  his  share  in  the  dis- 
tribution. The  other  claimants  having  their  shares 
fixed  by  definite  laws,  the  laborer  can  only  wait  and 
accept  what  is  left ;  an  amount  that  may  be  either 
greater  or  less  than  was  originally  contemplated  by 
the  testator. 

Walker  replied  to  this  by  referring  to  his  other 
writings,  in  which  he  had  persistently  advocated  the 
importance  of  labor  organizations.  It  was,  however, 
open  to  his  critics  to  urge  that  if  he  had  followed  his 
"  Residual  Claimant  Theory"  to  its  logical  conclusion 
he  would  have  seen  how  inconsistent  it  was  with  his 
previously  declared  position  on  the  subject  of  trades 
unions,  and  that  he  must  abandon  one  or  the  other 
of  these  positions. 

Walker  also  referred,  in  rebuttal,  to  the  original 
text,  in  which  he  developed  the  "  Residual  Claimant 
Theory  of  Wages,"  and  called  attention  to  the  fact 
that  he  had  there  stated  that  the  laborers  would 


262  VALUE   AND  DISTRIBUTION. 

receive  their  residual  share  "unless  by  their  own 
neglect  of  their  interest,  or  through  inequitable  laws, 
or  social  customs  having  the  force  of  laws,"  etc. 
(page  251).  This,  of  course,  provokes  the  question, 
Does  not  this  qualification  practically  negative  the 
"Residual  Claimant  Theory"?  If  through  law  or 
custom  the  laborer  is  prevented  from  securing  this  re- 
sidual share,  has  not  his  resemblance  to  the  residual 
legatee  of  an  estate,  in  any  ordinary  use  of  the  term, 
practically  disappeared  ?  For,  in  this  event,  the  la- 
borer, like  every  other  contestant,  must  exert  what- 
ever monopoly  power  he  can  control,  if  he  wishes  to 
avoid  a  loss.  Again,  Walker  writes  that  the  laborer 
may  lose  his  advantage  by  "  weak,  spasmodic,  or  un- 
intelligent competition  with  the  employing  class." 
(Page  259.)  If  this  is  true,  does  it  not  follow  that  the 
laborer's  share  depends,  in  last  resort,  not  upon  any  re- 
sidual claim,  but  upon  his  power  to  have  and  to  hold  ? 
Nor  was  Walker  very  successful  in  his  reply  to 
the  further  criticism  that  there  is  no  more  reason  for 
regarding  labor  than  for  regarding  capital  as  the 
residual  claimant.*  To  this  he  replies,  "  This  is  per- 
fectly true  provided  the  laboring  classes  are  placed  at 
a  disadvantage  economically  by  excess  of  numbers 
over  opportunities  for  employment,  or  by  a  painfully 
slow  increase  of  capital,  due  either  to  the  severity  of 
natural  conditions  or  to  social  violence  or  disorder. 


*  See  John  A.  Hobson's  criticism  and  Walker's  reply  in  the 
Quarterly  Journal  of  Economics,  1891. 


THE   RESIDUAL   CLAIMANT  THEORY   OF  WAGES.        263 

In  the  latter  case,  it  would  be  the  capitalist,  not  the 
laborer,  who  would  have  the  '  upper  hand  on  the 
stick.'  In  fact,  however,  in  all  well-ordered  com- 
munities, enjoying  large  natural  resources,  the  ac- 
cumulation of  capital  tends  to  outrun  the  increase 
of  population,  while  the  ability  of  capitalists  (not  of 
employers)  to  combine  so  as  to  prevent  the  rate  of  in- 
terest from  falling  under  the  pressure  of  a  rapidly 
increasing  supply  is  conspicuously  less  than  the 
ability  of  laborers  so  to  combine  as  to  hold  up  the 
rate  of  wages.  It  was  simply  and  solely  on  account 
of  this  economic  advantage  in  such  communities  that 
the  mastery  of  the  situation  was  attributed  to  the 
laboring  class."  (Page  422,  "  Quarterly  Journal  of 
Economics,  1891.") 

In  answer  to  this  it  may  again  be  urged,  first, 
that  when  we  declare  that  the  laborer  gets  that  which 
he  is  able  to  take  and  strong  enough  to  defend,  we 
have  practically  abandoned  the  concept  of  a  residual 
claimant ;  secondly,  on  the  very  pages  where  Walker 
develops  this  Residual  Claimant  Theory  of  Wages  he 
holds  that  in  the  case  of  an  increase  in  the  product 
due  to  the  efforts  of  the  laborer,  "  that  increase  goes 
to  them  by  purely  natural  laws,  provided  only  com- 
petition be  full  and  free."  In  other  words,  his  con- 
tention that  the  laborers  are  the  residual  claimants 
because  they  have  the  monopoly  advantage  of  the 
capitalist  is  stultified  by  this  assumption  of  free  com- 
petition as  a  necessary  condition  of  their  receiving 
the  product  of  their  labor. 


264  VALUE  AND  DISTRIBUTION. 

The  conclusion  to  which  we  are  here  led  is  that 
parts  of  the  earnings  of  land,  capital,  entrepreneur, 
and  labor  are  determined  in  each  case  by  definite 
laws.  There  is,  however,  another  share  that  is  in- 
capable of  reduction  under  any  exact  law,  since  its 
amount  can  only  be  determined  by  the  relative  mo- 
nopoly strength  of  the  several  factors  in  production. 
There  is,  however,  no  residual  claim  involved  in  this 
determination,  since  it  may  be  secured  in  part  by 
each  and  every  factor  in  production. 


CHAPTER  III. 

THE   PRODUCTIVITY  THEORY  OP  WAQES. 

THOUGH  Walker  failed  to  establish  his  "  Residual 
Claimant  Theory  of  Wages,"  yet  his  discussion  of  the 
problem  was  not  without  importance  as  a  protest 
against  one  phase  of  the  "  Wages  Fund  Doctrine." 
We  have  seen  that  Ricardo  followed  this  doctrine  to 
its  legitimate  conclusion,  and  held  that  the  efficiency 
or  productivity  of  labor  did  not  affect  wages  in  any 
direct  way.  We  have  now  to  see  that  Walker's 
theory  of  wages  involved  a  vigorous  protest  against 
this  necessary  consequence  of  the  "  Wages  Fund 
Doctrine." 

I.  THE  GENERAL   PRODUCTIVITY  THEORY  OF  WAGES. 

134.  Walker's  Contention. — In  his  "Political 
Economy,"  1888  edition,  Walker  writes  as  follows : 
"  In  the  theory  of  distribution  here  proposed  wages 
equal  the  product  of  industry  minus  the  three  parts 
already  determined  in  their  nature  and  amount.  In 
this  view  the  laboring  class  receive  all  they  help  to  pro- 
duce, subject  to  deduction  on  the  three  several  ac- 
counts mentioned."  (Page  248.)  The  three  several 
accounts  are,  of  course,  rent,  interest,  and  profit. 

"  These  three  shares  being  cut  off,  the  product  of 
industry,  the  whole  remaining  body  of  wealth,  daily 
or  annually  created,  is  the  property  of  the  laboring 

265 


266  VALUE  AND   DISTRIBUTION. 

class :  their  wages,  or  the  remuneration  of  their  ser- 
vices. So  far  as,  by  their  energy  in  work,  their 
economy  in  the  use  of  materials,  or  their  care  in  deal- 
ing with  the  finished  product,  the  value  of  that  product 
is  increased,  that  increase  goes  to  them  by  purely  natu- 
ral laws,  provided  only  competition  be  full  and  free." 
(Page  250.) 

That  this  writer  was  not  entirely  happy  in  his 
residual  legatee  illustration  must,  of  course,  be  ad- 
mitted. It  is,  however,  unfortunate  that  his  critics 
have  so  strongly  accented  this  phase  of  his  argument 
as  to  obscure  their  view  of  the  important  truth  con- 
tained in  the  closing  sentence  of  the  above  paragraph, 
namely, — that  wages  are  in  some  measure  dependent 
upon  the  productivity  of  labor.  This  is,  indeed,  so 
manifest  that  we  cannot  but  wonder  that  it  was  not 
until  the  last  quarter  of  the  present  century  that  a 
conscious  attempt  was  made  to  develop  a  productivity 
theory  of  wages. 

II.    MARGINAL  PRODUCTIVITY  THEORY  OF  WAGES. 

It  will  be  noted  that  Walker's  contention  that  the 
laborer  receives  his  entire  contribution  to  the  social 
product,  or  that  wages  are  determined  by  the  prod- 
uctivity of  labor,  leaves  open  the  very  important 
question,  What  productivity  of  labor  is  it  that  deter- 
mines the  rate  of  wages?  In  other  words,  Walker 
here  contents  himself  with  a  vague,  indefinite  con- 
cept of  productivity,  much  as  the  advocates  of  the 
earlier  utility  theory  of  value  contented  themselves 


THE   PRODUCTIVITY  THEORY  OF  WAGES.  267 

with  a  vague,  indefinite  concept  of  utility.  The  dis- 
cussion, however,  was  not  long  allowed  to  remain  in 
this  unsatisfactory  state.  With  the  development 
of  the  marginal  utility  theory  of  value  economists 
quickly  saw  that  the  value  of  labor,  like  the  value  of 
all  other  commodities,  is  in  some  measure  determined 
by  its  marginal  utility  or  productivity. 

135.  Concrete  and  Abstract  Concepts  of  Labor. 
— But  before  much  progress  could  be  made  in  the 
development  of  this  thought  it  was  necessary  clearly 
to  distinguish  between  two  essentially  different  con- 
cepts of  labor.  In  the  development  of  the  marginal 
productivity  theory  of  interest  we  saw  that  there  are 
two  essentially  different  concepts  of  capital :  first,  as  a 
sum  of  concrete  commodities,  tools,  machines,  etc., 
and,  second,  as  an  abstract  mobile,  homogeneous  fund. 
The  first  to  recognize  the  existence  of  similar  con- 
cepts in  the  case  of  labor  was  Karl  Marx,  and  in  this 
he  certainly  made  a  most  important  constructive 
contribution  to  economic  theory. 

Marx  writes:  "By  making  the  coat  the  equivalent  of 
the  linen  we  equate  the  labor  embodied  in  the  former 
to  that  in  the  latter.  Now,  it  is  true  that  the  tailor- 
ing, which  makes  the  coat,  is  concrete  labor  of  a  dif- 
ferent sort  from  the  weaving,  which  makes  the  linen. 
But  the  act  of  equating  it  to  the  weaving  reduces 
the  tailoring  to  that  which  is  really  equal  in  the  two 
kinds  of  labor,  to  their  common  character  of  human 
labor.  In  this  roundabout  way,  then,  the  fact  is  ex- 
pressed, that  weaving  also,  in  so  far  as  it  weaves 


268  VALUE  AND   DISTRIBUTION. 

value,  has  nothing  to  distinguish  it  from  tailoring, 
and  consequently  is  abstract  human  labor"  (Page 
12,  Part  I.  Chap.  I.)  (The  italics  are  mine.) 

Or  as  the  abstract  mobile,  homogeneous  fund  of 
capital  finds  concrete  embodiment  in  loom  and  forge, 
so,  too,  the  abstract  mobile,  homogeneous  fund  of  labor 
finds  concrete  embodiment  in  weaver  and  blacksmith. 
I  do  not  mean  to  say  that  Marx  saw  this  parallelism 
between  capital  and  labor,  for  his  whole  argument 
would  refute  any  such  claim.  But  that  he  did  have 
a  fairly  clear  notion  of  the  two  concepts  of  labor,  first 
as  an  abstract  fund,  and  second  as  a  concrete  embodi- 
ment of  this  fund,  can  hardly  be  denied.  So,  too, 
when  he  talks  of  "socially  necessary  labor"  as  the 
ultimate  measure  of  value,  he  doubtless  had  in  mind 
the  earnings  of  the  abstract,  mobile,  homogeneous 
fund  of  labor. 

By  far  the  clearest  and  ablest  development  of  this 
phase  of  the  theory  of  wages  is  found  in  an  article  by 
J.  B.  Clark  on  "  The  Law  of  Wages  and  Interest," 
which  was  published  in  the  "  Annals  of  the  AmerU 
can  Academy,"  and  from  which  we  have  already 
quoted  in  our  review  of  the  productivity  theory  of 
interest.  We  shall  here  take  the  liberty  of  abstract- 
ing Clark's  argument  in  regard  to  wages  in  a  some- 
what free  manner. 

As  the  entrepreneur  pays  a  certain  level  average 
or,  better  still,  minimum  rate  of  interest  for  the  money 
he  has  borrowed  and  invested  in  machines  and  tools, 
so,  too,  he  pays  a  certain  minimum  rate  of  wages  to 


THE  PRODUCTIVITY  THEORY  OF  WAGES.  269 

the  laborers  whom  he  employs.  Special  machines 
and  men  may  earn  much  more  than  this  so-called 
minimum  or  normal  rate,  but  if  they  do,  it  is  in 
their  concrete  and  not  in  their  abstract  character. 
In  other  words,  there  is  frequently  a  wide  difference 
between  the  earnings  of  the  concrete  loom  or  weaver 
and  the  earnings  of  capital  and  labor  conceived  as 
abstract,  mobile  funds.  The  earnings  of  the  concrete 
forms  are  usually  determined  under  monopoly  con- 
ditions, while  the  earnings  of  a  mobile,  homogeneous 
fund  are  necessarily  determined  under  conditions  of 
free  competition  or  under  the  conditions  of  normal 
value.  It  follows  from  this  that  in  any  discussion 
of  normal  wages  we  have  to  deal,  not  with  special 
concrete  forms  of  labor,  but  with  labor  as  a  mobile, 
homogeneous  fund,  capable  of  taking  any  form  the 
entrepreneur  may  desire. 

136.  The  Abstract  Fund  remains  constant  while 
Concrete  Forms  change. — Here,  too,  the  parallel- 
ism between  labor  and  capital  is  complete.  As  ma- 
chines wear  out  and  are  replaced  from  their  previous 
earnings,  so,  too,  particular  laborers  become  super- 
annuated and  die ;  in  the  mean  time  they  have  reared 
others  to  take  their  places  ;  in  this  way  it  becomes 
possible  to  transfer  the  abstract  fund  from  one  con- 
crete form  to  another.  If  the  wages  of  textile  labor 
fall  below  those  of  iron-working,  the  younger  men 
as  they  grow  up  will  prefer  the  trades  connected 
with  the  latter  industry.  It  is  in  this  way  that 
the  mobility  of  the  abstract  fund  is  maintained. 


270  VALUE  AND  DISTRIBUTION. 

It  is  true  that  there  are  direct  transfers  of  mature 
men  from  one  industry  to  another,  and  with  the 
continued  subdivision  of  labor  this  becomes  more 
and  more  frequent;  but  it  should  also  be  remem- 
bered that  there  is  considerable  mobility  of  the 
abstract  fund  due  to  the  diverting  of  the  younger 
men  from  the  less  remunerative  to  the  more  remu- 
nerative trades. 

137.  The  Rate  of  Wages  determined  by  the  Mar- 
ginal Productivity  of  Labor. — In  our  discussion  of 
the  productivity  theory  of  interest  we  saw  that  if  to 
a  fixed  fund  of  labor  we  add  successive  increments 
of  capital,  "the  last  dose  of  capital,"  to  use  Von 
Thiinen's  phrase,  is  compelled  to  find  employment 
in  the  least  profitable  industry.  As  it  is  a  mobile, 
homogeneous  fund  of  capital  that  we  are  here  con- 
sidering, it  is  manifest,  according  to  the  law  of  mar- 
ginal utility,  that  the  value  of  the  whole  fund  is  fixed 
by  the  productivity  of  the  last  dose  or  increment  that 
finds  employment,  or  that  interest  is  determined  by 
the  marginal  productivity  of  the  abstract  fund  of 
capital.  That  this  is  also  true  of  the  abstract  fund 
of  labor  may  readily  be  shown.  We  have  only  to 
assume  that  the  supply  of  capital  remains  constant, 
while  successive  increments  are  added  to  the  fund 
of  labor,  to  see  that  this  labor  will  be  compelled  to 
find  employment  in  less  and  less  productive  indus- 
tries, and  that  here,  too,  according  to  the  law  of  mar- 
ginal utility,  the  value  of  the  whole  will  be  determined 
by  the  product  of  the  last  increment.  In  other  words, 


THE  PRODUCTIVITY  THEORY  OF  WAGES.  271 

normal  wages  are  fixed  by  the  marginal  productivity 
of  the  abstract  fund  of  labor. 

Nor  is  Clark  alone  in  this  recognition  of  the  mar- 
ginal productivity  of  labor  as  the  determinant  of 
wages.  In  the  "  Proceedings  of  the  American  Eco- 
nomic Association,"  1888,  Dr.  Stuart  Wood  pub- 
lished an  article  on  "The  Theory  of  Wages,"  in 
which  this  proposition  is  very  clearly  enunciated. 
He  writes :  "  No  labor  will  be  sold  unless  it  pays 
somebody  to  buy  it.  Rather  than  abandon  its  use 
the  buyer  would  prefer  to  pay  for  each  particular 
act  of  labor  a  sum  in  proportion  to  its  real  utility  to 
himself.  But  it  does  not  follow  that  he  must  always 
pay  so  much  as  this,  nor  does  it  follow  that  labor, 
as  a  whole,  is  paid  the  full  price  which  employers 
could  afford  to  give  rather  than  dispense  with  its  use 
entirely.  The  price  of  all  labor  is  regulated,  as  are 
the  prices  of  all  commodities,  by  its  final  utility ;  by 
the  utility,  that  is,  of  the  portion  which  comes  into 
use  last;  that  portion,  in  short,  whose  services  are 
least  useful  and  least  highly  valued." 

III.  THE  ELEMENT  OF  TRUTH  IN  THE  WAGES  FUND  DOCTRINE. 
138.  Capital  constant,  Population  increasing. — 
Under  our  last  assumption,  that  the  supply  of  capital 
remains  constant  while  the  supply  of  labor  is  in- 
creased, labor  is  forced  into  less  and  less  productive 
industries,  or,  if  you  like,  the  laborer  is  forced  to 
work  with  less  efficient  and  possibly  fewer  tools. 
Population  presses  not  upon  land  alone,  but  upon  the 


272  VALUE  AND  DISTRIBUTION. 

whole  environment.  In  other  words,  we  have  that 
neo-Malthusianism  to  which  Malthus  has  called  at- 
tention in  his  later  editions.  The  free  fund  of  labor 
being  forced  into  less  and  less  productive  industries, 
and  wages  being  fixed  by  the  marginal  productivity 
of  labor,  it  is  manifest  that  in  this  pressure  of  popu- 
lation wages  are  lowered. 

139.  Population  constant,  Capital   increasing. — 
Let  us  now  reverse  this  assumption  and  inquire  what 
will  happen  if  population  remains  stationary  while 
the  free  fund  of  capital  increases.     It  is,  of  course, 
manifest  that  this  will  result  in  a  complete  reversion 
of  the  conditions  we  have   just  examined.     Every 
laborer  will  have  more  efficient  tools ;  in  other  words, 
he  will  receive  more  and  more  help  from  his  environ- 
ment, and  the  marginal  productivity  or  the  normal 
wages  of  labor  will  be  increased. 

140.  A  Certain  Best  Ratio  of  Capital  and  Labor. 
— We  need  not,  however,  conclude  that  the  gain  of 
one  factor  is  necessarily  a  loss  for  the  other  factor. 
For  from  the  above  argument  it  is  not  a  far  cry  to 
the   conclusion   that  with   the   given    technical  de- 
velopment of  any  country  or  time  there  is  a  certain 
ratio  between  the  supply  of  labor  and   capital  that 
will  yield  the  best   results   for  both    factors.      We 
have  seen  that  with  capital  constant  and  the  supply 
of  labor  increasing,  the  additional    labor    yields   a 
diminished  return;    again,  with  labor  constant  and 
the  supply  of  capital  increasing,  labor  has  the  ad- 
vantage and  capital  must  content  itself  with  a  dimin- 


THE  PRODUCTIVITY  THEORY  OF  WAGES.     273 

ished  return.  This,  however,  is  only  after  the  ratio 
of  capital  and  labor  has  reached  a  certain  point. 
Before  reaching  this  point  the  additional  labor  or 
capital  secures  an  increased  return.  Hence  the 
point  at  which  the  transition  is  made  from  in- 
creasing to  diminishing  return  is  the  ratio  which 
yields  the  best  return  to  both  factors.  It  is  only 
when  we  disturb  this  ratio  that  one  factor's  gain 
becomes  another  factor's  los§.  This  may  be  well 
for  the  one  who  enjoys  the  advantage,  but  it  is  not 
so  well  for  the  others  or  for  society  as  a  whole. 
This  evil  tends,  of  course,  to  correct  itself;  for  if 
those  who  control  the  fund  of  capital  cannot  secure 
a  normal  surplus,  the  tendency  to  save,  and  with  it 
the  increase  of  capital,  will  suffer  a  decline.  This 
will  continue  until  the  balance  is  restored  and  capital 
again  secures  its  normal  return.  So,  too,  labor  will 
cease  to  increase  in  numbers  or  efficiency  if  it  does 
not  secure  a  similar  normal  surplus. 

141.  Application  to  the  Wages  Fund  Doctrine. — 
It  will  now  be  manifest  how  intimate  is  the  relation 
between  the  supply  of  capital  and  the  supply  of 
labor,  and  how  an  increase  in  capital  results  in  an 
increase  in  wages  by  raising  the  marginal  produc- 
tivity of  labor.  This,  then,  is  the  soul  of  truth  in 
the  Wages  Fund  Doctrine.  The  relation  between 
the  two  factors,  however,  is  not  so  simple  that  we  can 
obtain  the  rate  of  market  wages  by  dividing  the  total 
capital  by  the  total  number  of  laborers.  Again,  it 
needs  to  be  remembered  that,  just  as  up  to  a  certain 

18 


274  VALUE  AND  DISTRIBUTION. 

point  the  rate  of  wages  tends  to  increase  with  the 
supply  of  capital,  so,  too,  up  to  a  certain  point  the 
rate  of  interest  tends  to  increase  with  the  supply  of 
labor.  In  conclusion,  I  would  again  call  attention  to 
the  fact  that  we  are  here  discussing  not  the  earnings 
of  loom  or  weaver,  but  the  earnings  of  the  mobile, 
homogeneous  funds  of  capital  and  labor. 

IV.    OBJECTIONS  TO  THE  MARGINAL  PRODUCTIVITY  THEORY. 

It  may  be  said  that  any  attempt  to  formulate  a 
productivity  theory  of  wages  is  open  to  the  same  ob- 
jections that  were  urged  against  the  productivity 
theory  of  interest. 

Even  though  we  pass  from  the  vague  concept  of 
general  productivity  to  the  very  definite  concept  of 
marginal  productivity,  much  still  remains  to  be 
done;  for,  as  this  margin  is  conditioned  upon  the 
supply  of  labor,  it  follows  that  any  complete  analysis 
must  tell  us  something  about  the  limitation  of  this 
supply. 

142.  What  determines  the  Margin  of  Production? 
What  limits  the  Supply  of  Labor? — In  the  case 
of  interest,  we  saw  that  this  limitation  was  effected 
by  the  disutility  or  abstinence  endured  by  the  mar- 
ginal saver  or  capitalist.  The  question,  therefore, 
presents  itself,  and  is  certainly  an  interesting  one, 
How  is  this  limitation  of  supply  effected  in  the  case 
of  labor  ?  Is  there  here  any  interference  with  con- 
sumption that  corresponds  with  the  abstinence  of  the 
marginal  saver?  In  Chapter  V.  we  hope  to  show 


THE  PRODUCTIVITY  THEORY  OF  WAGES  275 

that  there  is  some  such  interference ;  but  before 
doing  so  it  will  be  necessary  to  disabuse  the  mind 
of  one  of  the  inherited  traditions  of  economic  theory. 
The  impression  made  by  the  first  edition  of  Malthus's 
"  Essay  on  Population"  was  so  strong  that  we  con- 
tinue, more  or  less  unconsciously,  to  think  of  wages 
as  containing  only  a  bare  subsistence,  or  that  labor 
does  not,  like  capital,  secure  a  surplus.  If,  however, 
it  can  be  shown  that  normal  wages  may  contain  a 
surplus,  it  would  suggest  the  possibility  of  construct- 
ing an  "exchange  theory  of  wages"  identical  in  many 
respects  with  Bohm-Bawerk's  "  Exchange  Theory  of 
Interest."  As  the  belief  that  wages  can  contain  only 
a  bare  existence  is  largely  due  to  the  first  edition  of 
the  "  Essay  on  Population,"  we  cannot  do  better  than 
follow  Malthus  in  his  later  editions,  in  which  he  re- 
pudiates this  contention,  and  holds  that  all  progress 
is  conditioned  upon  a  surplus  in  wages. 


CHAPTER    IV. 

THE   MALTHUSIAN    THEORY    OF    WAGES. 

IT  hardly  need  be  urged  that  in  his  "  Essay  on 
Population"  Malthas  set  forth  a  cost  theory  of  wages. 
In  the  first  edition  his  general  contention  was  that 
the  sexual  instincts  or  desires  are  so  strong  that  any 
increase  in  the  food-supply  of  the  lowest  classes  can 
only  result  in  a  corresponding  increase  in  the  num- 
ber of  their  children ;  and  that  this  increase  would 
be  continued  until  population  again  pressed  upon 
subsistence.  In  other  words,  he  concludes  that,  in 
the  long  run,  the  laborer  cannot  hope  to  secure  more 
than  a  bare  existence.  This  is  equivalent  to  saying 
that  the  wages  of  labor  cannot  permanently  exceed 
the  cost  of  producing  labor. 

I.   THE  EARLIER  MALTHUSIAN  THEORY   OF   WAGES. 

143.  The  Pressure  of  Population  upon  Subsist- 
ence.— In  the  development  of  his  thesis,  Malthus 
held  that  population  tends  to  increase  in  a  geomet- 
rical, and  food  in  an  arithmetical,  progression,  basing 
these  conclusions  very  largely  upon  American  expe- 
rience, where  population  had  doubled  every  twenty- 
five  years.  This,  of  course,  would  soon  result  in  a 
wide  divergence  between  population  and  the  supply 
of  food.  Without  insisting  upon  the  geometrical  and 
arithmetical  concepts,  we  may  yet  admit  that  popula- 

276 


THE  MALTHUSIAN  THEORY  OF  WAGES.       277 

tion   does  tend  to  outrun  the  food-supply,  or  that 
population  does  tend  to  press  upon  subsistence. 

144.  The   Function   of  Misery  and  Vice. — This 
brings  us  to  the  question,   What  influences  are  at 
work   to   restrain  this  tendency  ?     Mai  thus,  in  his 
first  edition,  replies :   "  These  checks  on  population 
are,  among  mankind,  misery  and  vice.  .  .  .  No  pos- 
sible form  of  society  could  prevent  the  almost  constant 
action  of  misery  upon  a  great  part  of  mankind  if  in 
a  state  of  inequality,  and  upon  all  if  all  are  equal." 
Again,  he  writes  :  "  That  the  superior  power  of  popu- 
lation cannot  be  checked  without  producing  misery 
or  vice,  the  ample  portion  of  these  two  bitter  ingre- 
dients in  the  cup  of  human  life,  and  the  continuance 
of  the  physical  causes  that  seem  to  have  produced 
them,  bear  too  convincing  a  testimony." 

145.  The  Standard  of  Life. — It  should  be  noted, 
however,  that  in  at  least  one  passage  of  the  first 
edition  we  find  some  recognition  of  a  different  con- 
dition of  society.     Mai  thus  writes  :  "  In  the  different 
states  of  Europe  there  must  be  some  variations  in  the 
proportion  between  the  number  of  inhabitants  and 
the  quantity  of  food  consumed,  arising  from  the  dif- 
ferent habits  of  living  that  prevail  in  each  state.    The 
laborers  of  the  south  of  England  are  so  accustomed 
to  eat  fine  wheaten  bread  that  they  will  suffer  them- 
selves to  be  half  starved  before  they  will  submit  to 
live  like  the  Scotch  peasants.     They  might,  perhaps, 
in  time,  by  the  constant  operation  of  the  hard  law  of 
necessity,  be  reduced  to  live  even   like  the  lower 


278  VALUE  AND  DISTRIBUTION. 

Chinese ;  and  the  country  would  then  with  the  same 
quantity  of  food  support  a  greater  population.  But 
to  effect  this  must  always  be  most  difficult,  and  every 
friend  of  humanity  will  hope,  an  abortive  attempt." 
(Page  132,  first  edition.) 

Malthus,  however,  does  not  dwell  long  on  this 
more  hopeful  view  of  society,  for,  on  page  218,  he 
writes  :  "  The  principal  argument  of  this  essay  tends 
to  place  in  a  strong  point  of  view  the  improbability 
that  the  lower  classes  of  the  people  in  any  country 
should  ever  be  sufficiently  free  from  want  and  labor 
to  attain  any  high  degree  of  intellectual  improve- 
ment." Again,  on  page  346,  he  writes :  "  It  is  un- 
doubtedly a  most  disheartening  reflection  that  the 
great  obstacle  in  the  way  of  any  extraordinary  im- 
provement in  society  is  of  a  nature  that  we  can 
never  hope  to  overcome." 

146.  The  Pressure  not  Remote  but  Immediate. — 
To  Malthus's  mind,  this  pressure  of  population  upon 
subsistence  is  not  a  remote  contingency,  but  an  ever- 
present  reality.  In  this  connection  he  writes :  "  An 
event  at  such  a  distance  might  fairly  be  left  to  Provi- 
dence, but  the  truth  is,  that  if  the  view  of  the  argu- 
ment given  in  this  essay  be  just,  the  difficulty,  so  far 
from  being  remote,  would  be  imminent  and  imme- 
diate. At  every  period  during  the  progress  of  civil- 
ization, from  the  present  moment  to  the  time  when 
the  earth  had  become  like  a  garden,  the  distress  for 
want  of  food  would  be  constantly  pressing  upon  all 
mankind  if  they  were  equal.  Though  the  produce 


THE  MALTHUSIAN  THEORY  OF  WAGES.  279 

of  the  earth  might  be  increasing  every  year,  popu- 
lation would  be  increasing  much  faster,  and  the  re- 
dundancy must  necessarily  be  repressed  by  the  peri- 
odical or  constant  return  of  misery  and  vice."  (Page 
144,  first  edition.)  Mai  thus  also  urges  that  at  any 
given  time,  say  the  present,  population  is  not  in- 
creasing as  fast  it  might  if  nature  was  more  boun- 
tiful. Hence  the  pressure  of  population  upon  sub- 
sistence is  everywhere  an  ever-present  reality.  So 
pessimistic  a  view  of  the  future  of  the  laboring  classes, 
and,  indeed,  of  society  as  a  whole,  could  not  but  pro- 
voke much  violent  criticism ;  and  as  a  result  of  this 
criticism  we  find  that  as  early  as  the  second  edition 
Malthus  was  forced  to  modify  his  earlier  statement 
and  to  recognize  that  moral  restraint  also  plays  a  part 
in  checking  the  too  rapid  growth  of  population.  Be- 
fore leaving  the  first  edition  it  may  be  well  clearly 
to  understand  the  conditions  under  which  it  was 
written. 

147.  The  Issue  between  Malthus  and  Godwin. — 
The  first  edition  of  Malthus's  "  Essay  on  Population" 
appeared  in  1798,  and  was  in  answer  to  an  essay  on 
"  Avarice  and  Profusion,"  by  William  Godwin.  The 
issue  between  these  two  writers  is  clearly  stated  in 
the  latter  part  of  the  first  edition  of  Malthus's  "  Es- 
say." He  there  writes :  "  The  great  bent  of  Mr. 
Godwin's  work  on  political  justice,  if  I  understand  it 
rightly,  is  to  show  that  the  greater  part  of  the  vices 
and  weaknesses  of  man  proceed  from  the  injustice  of 
their  political  and  social  institutions,  and  that  if 


280  VALUE  AND  DISTRIBUTION. 

these  were  removed  and  the  understandings  of  men 
more  enlightened,  there  would  be  little  or  no  temp- 
tation in  the  world  to  evil.  It  has  been  clearly 
proved,  however  (at  least  as  I  think),  that  this  is  an 
entirely  false  conception,  and  that,  independent  of 
any  political  or  social  institutions  whatever,  the 
greater  part  of  mankind,  from  the  fixed  and  unalter- 
able laws  of  nature,  must  ever  be  subject  to  the  evil 
temptations  arising  from  want."  * 

Godwin,  of  course,  reflected  the  movement  in 
thought  which  in  France  had  culminated  in  the 
Revolution.  He  held  that  the  ills  of  life  might  be 
removed  by  changes  in  the  social  institutions  of  the 
time ;  that  it  was  these  alone  that  interfered  with  the 
ultimate  perfectibility  of  mankind.  Malthus  repudi- 
ated this  doctrine  of  the  perfectibility  of  man,  and 
held  that  there  are  subjective  as  well  as  objective 
difficulties  to  be  encountered ;  that  the  evil  in  the 
world,  its  pain  and  misery,  are  due  not  merely  to  the 
failure  of  social  institutions,  but,  far  more,  to  the 
strength  of  certain  impulses  or  passions  inherent  in 
the  very  nature  of  man.  Had  Malthus  confined 
himself  to  defending  this  thesis  no  confusion  would 
have  arisen,  but,  as  a  matter  of  fact,  he  practically 
held  that  these  subjective  causes  are  the  only  ones 
that  are  operative,  and  so  was  led  to  conclude  that  no 
improvement  in  the  condition  of  the  lower  classes  is 
possible. 

*  P.  267,  first  edition,  "  Essay  on  Population." 


THE  MALTHUSIAN  THEORY  OF  WAGES.      281 

II.   THE  LATER  MALTHUSIAN  THEORY  OF  WAGES  AND  THE 
CONDITIONS  OF  PROGRESS. 

In  the  third  edition  of  the  "  Essay  on  Population" 
we  find  a  tentative  abandonment  of  that  concept  of 
society  in  which  wages  cannot,  for  any  long  time, 
exceed  the  bare  cost  of  existence,  or  in  which  a  large 
part  of  mankind  is  doomed  to  a  misery  whose  only 
mitigation  is  to  be  found  in  vice. 

148.  Virtue  and  Intelligence  as  Checks  to  Popu- 
lation.— In  this  third  edition^Malthus  writes  :  "  The 
evils  arising  from  the  principles  of  population  are 
exactly  of  the  same  nature  as  the  generality  of  other- 
evils  which  excite  fewer  complaints ;  they  are  in- 
creased by  human  ignorance  and  indolence  and  di- 
minished by  human  knowledge  and  virtue."  (Book 
IV.  Chap.  III.) 

Again  he  writes :  "  From  a  view  of  the  state  of  so- 
ciety in  former  periods  compared  with  the  present,  I 
should  certainly  say  that  the  evils  resulting  from  the 
principle  of  population  have  rather  diminished  than 
increased,  even  under  the  disadvantages  of  an  almost 
total  ignorance  of  their  real  cause.  And  if  we  can 
indulge  the  hope  that  this  ignorance  will  be  gradu- 
ally dissipated,  it  does  not  seem  unreasonable  to  ex- 
pect that  they  will  be  still  further  diminished.  .  .  . 
On  the  whole,  therefore,  though  our  future  prospects 
respecting  the  evils  arising  from  the  principle  of 
population  may  not  be  so  bright  as  we  could  wish, 
yet  they  are  far  from  being  entirely  disheartening, 
and  by  no  means  preclude  that  gradual  and  progres- 


282  VALUE   AND   DISTRIBUTION. 

sive  improvement  in  human  society  which,  before 
the  late  wild  speculations  on  the  subject,  was  the 
subject  of  rational  expectation."  (Third  edition, 
Book  IV.  Chap.  I.) 

149.  Increase  of  the  Food  Supply  an  Essential 
Condition  of  Progress. — This  more  hopeful  view  of 
society  led  Malthus  to  inquire  in  his  later  editions 
as  to  the  conditions  of  social  progress,  and,  as  a  re- 
sult of  this  inquiry,  he  concluded  that  a  surplus  in 
the  supply  of  food  is  the  primary  and  essential  con- 
dition of  this  progress.  This  discussion  first  ap- 
peared in  a  volume  which  was  published  as  an 
addition  to  the  fourth  edition,  but  its  best  statement 
is  found  in  the  seventh  edition  in  a  chapter  devoted 
to  "  General  Observations."  He  writes  :  "  That  an 
increase  of  population,  when  it  follows  in  its  natural 
order,  is  both  a  great  positive  good  in  itself  and 
absolutely  necessary  to  a  further  increase  in  the  an- 
nual produce  of  the  land  and  labor  of  any  country 
I  should  be  the  last  to  deny.  The  only  question  is, 
What  is  the  order  of  its  progress  ?  In  this  point  Sir 
James  Stewart,  who  has  in  general  explained  this 
subject  so  well,  appears  to  me  to  have  fallen  into 
error.  He  determines  that  multiplication  is  the  effi- 
cient cause  of  agriculture,  and  not  agriculture  of 
multiplication.  But  though  it  may  be  allowed  that 
the  increase  of  people  beyond  what  could  easily  sub- 
sist on  the  natural  fruits  of  the  earth  first  prompted 
man  to  till  the  ground,  and  that  the  view  of  main- 
taining a  family,  or  of  obtaining  some  valuable  con- 


THE   MALTHUSTAN  THEORY   OF  WAGES.  283 

sideration  in  exchange  for  the  products  of  agriculture, 
still  operates  as  the  principal  stimulus  to  cultivation, 
yet  it  is  clear  that  these  products,  in  their  actual  state, 
must  be  beyond  the  lowest  ivants  of  the  existing  popula- 
tion before  any  permanent  increase  can  possibly  be 
supported."  (Page  382.)  "  And  in  the  same  manner, 
with  a  view  to  any  essential  improvement  in  the  condi- 
tion of  the  laborer,  which  is  to  give  him  a  greater  com- 
mand over  the  means  of  comfortable  subsistence,  it  is 
absolutely  necessary  that,  setting  out  from  the  lowest 
point,  the  increase  of  food  must  precede  and  be  greater 
than  the  increase  of  population"  (Page  383,  seventh 
edition.) 

150.  Manufactures  and  an  Advancing  Standard 
of  Life; — Despite  this  insistence  upon  an  increase  of 
the  food  supply  as  the  primary  condition  of  progress, 
Mai  thus  sees  quite  clearly  that  so  long  as  the  bulk 
of  the  wages  of  the  laboring  classes  is  expended  for 
food  there  is  little  hope  for  any  permanent  improve- 
ment in  their  condition.  In  a  foot-note  on  page  130 
of  the  fourth  edition  we  find  some  hint  of  the  process 
by  which,  as  Mai  thus  believes,  this  improvement  will 
be  effected.  He  there  writes  :  "  The  condition  of  the 
laboring  poor,  supposing  their  habits  to  remain  the 
same,  cannot  be  very  essentially  improved  but  by 
giving  them  a  greater  command  over  the  means  of 
subsistence.  But  an  advantage  of  this  kind  must 
from  its  nature  be  temporary,  and  is  therefore  really 
of  less  value  to  them  than  a  permanent  change  in 
their  habits.  But  manufactures  by  inspiring  a  taste 


284  VALUE   AND   DISTRIBUTION. 

for  comforts  tend  to  promote  a  change  in  their  habits, 
and  in  this  way  perhaps  counterbalance  all  their  dis- 
advantages/'* 

Malthus  here  continues  to  hold,  as  in  the  first  edi- 
tion, that  a  "  greater  command  over  the  means  of 
subsistence  or  of  food  will  eventually  stimulate  the 
growth  of  population,  and  so  only  helps  the  laborer 
temporarily."  He  then  finds  that  their  only  hope  is 
in  an  advancing  standard  of  life  or  in  an  increased 
taste  for  the  comforts  of  life,  and  that  this  is  fostered 
by  the  growth  of  manufactures.  His  agrarian  in- 
stincts led  him,  in  his  earlier  editions,  to  deprecate 
the  rapid  growth  of  the  towns,  with  their  bad  air  and 
general  overcrowding.  He,  indeed,  saw  in  these 
towns  the  great  menace  to  civilization.  Hence,  in 
the  above  passage,  in  which  he  urges  that  the  growth 
of  manufactures  is  an  essential  condition  of  progress, 
we  find  important  evidence  of  the  change  that  had 
gradually  taken  place  in  his  views  of  society. 

151.  Progress  depends  on  the  Supply  of  Capital 
as  well  as  on  the  Supply  of  Land. — Malthus,  in 
his  seventh  edition  (page  374),  makes  a  further  ad- 
vance by  showing  how  manufactures  may  effect  an 
advance  in  the  standard  of  life  despite  an  increasing 
pressure  upon  the  food  supply.  He  writes :  "  In 
the  natural  progress  of  cultivation  and  wealth  the 


*  The  best  modern  statement  of  this  contention  is  given  by 
F.  H.  Giddings  in  "  The  Modern  Distributive  Process,"  page 
54. 


THE  MALTHUSIAN  THEORY  OF  WAGES.  285 

production  of  an  additional  quantity  of  corn  will 
require  more  labor,  while,  at  the  same  time,  from 
the  accumulation  and  better  distribution  of  capital, 
the  continual  improvements  made  in  machinery,  and 
facilities  opened  to  foreign  commerce,  manufactures 
and  foreign  commodities  will  be  produced  or  pur- 
chased with  less  labor,  and  consequently  a  given 
quantity  of  corn  will  command  a  much  greater 
quantity  of  manufactures  and  foreign  commodities 
than  while  the  country  was  poor.  Although,  there- 
fore, the  laborer  may  earn  less  corn  than  before,  the 
superior  value  which  every  portion  which  he  does 
not  consume  in  kind  will  have  in  the  purchase  of 
conveniences  may  more  than  counterbalance  this  dim- 
inution. He  will  not,  indeed,  have  the  same  power 
of  maintaining  a  large  family,  but  with  a  small 
family  he  may  be  better  lodged  and  clothed,  and 
better  able  to  command  the  decencies  and  comforts 
of  life." 

It  hardly  need  be  urged  that  Malthus  here  has  in 
mind  a  progressing  society.  This,  of  course,  is  in 
sharp  contrast  with  the  concept  of  a  stationary  or 
retrograding  society,  which  lies  back  of  all  the  rea- 
soning of  the  first  edition  of  his  "  Essay."  And 
while  he  holds  that  the  bounty  of  nature  is  the  ini- 
tial cause  of  all  progress,  yet  he  recognizes  that  it 
is  not  land  alone,  but  the  condition  of  the  whole  en- 
vironment, that  determines  the  progress  of  mankind 
to  a  better  and  fuller  life. 

The  bounty  of  the  environment  gives  rise  to  new 


286  VALUE   AND   DISTRIBUTION. 

desires.  These  continue  to  be  gratified  as  luxuries  till 
by  and  by  they  become  necessities ;  the  standard  of 
life  has  advanced  and  population  again  presses  upon 
the  environment.  From  this  it  follows  that  if  further 
progress  is  to  be  made,  the  environment  must  again 
yield  a  surplus  above  this  standard  of  life.  Again, 
new  desires  arise,  are  gratified,  and  become  fixed, 
the  standard  is  again  advanced,  and  another  step  in 
social  progress  is  effected.  There  is  still  a  pressure 
between  population  and  environment,  but  it  is  no 
longer  the  environment  pressing  down,  but  the  in- 
dividual pressing  up.  There  is  still  a  struggle  for 
existence,  but  it  is  for  a  higher  and  nobler  existence. 
There  is  still  a  survival  of  the  fittest,  but  it  is  not  a 
survival  of  those  fitted  to  endure  a  more  and  more 
impoverished  environment,  but  a  survival  of  those 
fitted  to  enjoy  an  ever-improving  environment.  It 
is  no  longer  misery  and  vice,  but  the  bounty  of  the 
whole  environment  and  a  growth  in  moral  power  that 
gives  rise  to  an  ever-advancing  standard  of  life.* 

*  Darwin  makes  generous  acknowledgment  for  the  sugges- 
tions which  he  found  in  the  "  Essay  on  Population."  But  while 
his  views  accord  with  those  contained  in  the  first  edition  of 
the  "  Essay,"  they  'are  at  variance  with  those  expressed  in  the 
later  editions,  notably  the  seventh.  In  that  edition  Malthus 
seems  to  suggest  a  Lamarckian  rather  than  a  Darwinian  ex- 
planation of  the  phenomenon  of  progress.  For  he  finds  that 
all  progress  is  affected  through  changes  in  the  tastes  and 
desires  of  mankind  or  through  the  volition  of  the  organism. 

Darwin,  on  the  contrary,  holds  that  like  produces  like  with 
a  tendency  to  vary,  and  that  those  species  survive  whose  varia- 


THE  MALTHUSIAN  THEORY  OF  WAGES.  287 

152.  Malthus's  Changed  View  of  Society. — In  how 
far  Malthus's  change  of  attitude  was  due  to  the  im- 

tions  happen*  o>  be  in  harmony  with  the  changed  environment. 
All  is  here  left  to  the  chapter  of  accidents,  the  volition  of  the 
individual  counting  for  naught.  So  long  as  we  confine  our- 
selves to  a  study  of  the  lower  forms  of  life  there  is  much  to  sup- 
port this  contention,  for  it  is  undoubtedly  true  that  the  envi- 
ronment here  dominates  the  situation,  but  as  we  pass  to  the 
higher  organic  and  super-organic  phenomena  the  self-deter- 
mining power  of  the  individual  asserts  itself  with  ever-in- 
creasing power.  Indeed,  it  might  be  said  that  the  evolution  of 
all  organic  forms  is  but  an  escape  from  the  domination  of  the 
environment  or  a  growth  in  self-determining  power.  This  is 
clearly  recognized  by  men  of  Darwin's  school  when  they  study 
these  higher  phenomena.  Mr.  Spencer,  for  instance,  writes  in 
regard  to  the  evolution  of  conduct  as  follows :  "  We  saw  that 
conduct  is  distinguished  from  the  totality  of  actions  by  ex- 
cluding purposeless  actions,  but  during  evolution  this  distinc- 
tion arises  by  degrees.  In^the  very  lowest  creatures  most  of 
the  movements  from  moment  to  moment  made  have  not  more 
recognizable  aims  than  the  struggles  of  an  epileptic.  .  .  . 
Their  conduct  is  constituted  of  actions  so  little  adjusted  to 
ends  that  life  continues  only  so  long  as  the  accidents  of  the 
environment  are  favorable.  A  higher  form,  as  a  rotifer,  by 
better  adjusting  its  own  actions  becomes  less  dependent  upon 
the  actions  going  on  around  it,  and  so  preserves  itself  for  a 
longer  period."  ("Data  of  Ethics,"  p.  11.) 

In  other  words,  though  it  be  true  that  in  the  evolution  of 
lower  forms  "  nature  is  red  in  tooth  and  claw,"  yet  this  gives 
us  no  warrant  for  assuming  that  the  same  conditions  must 
prevail  in  the  evolution  of  the  higher  forms.  Or,  to  again 
return  to  economic  terms,  it  may  be  said  that  in  the  future 
social  progress  will  depend  less  upon  the  direct  pains  of  labor 
and  more  upon  the  disutility  of  abstinence. 


288  TALTJE  AND   DISTRIBUTION. 

provement  in  the  condition  of  the  masses  in  France 
subsequent  to  the  Revolution  it  is,  of  course,  impos- 
sible to  say.  But  we  do  know  that  m  his  later 
editions  he  refers  to  this  improvement  upon  more 
than  one  occasion.  (See  pages  189  and  320  of  the 
seventh  edition.) 

In  any  event,  there  can  be  no  question  about  his 
complete  change  of  attitude  towards  the  whole  social 
problem.  He  no  longer  has  in  mind  that  stationary 
condition  of  society  in  which  the  laborer  cannot  hope 
to  secure  more  than  a  bare  existence.  Instead,  he 
contemplates  a  hopeful  progressing  society  in  which 
the  laborer  secures  a  surplus  not  only  above  a  bare 
existence  but  above  an  ever-advancing  standard  of 
life.  It  must  be  borne  in  mind,  however,  that  it  is 
still  a  cost  theory  of  wages  that  Malthus  has  in  mind. 
In  his  first  edition  we  have  a  theory  of  normal  wages 
in  a  stationary  society,  while  in  his  later  editions 
he  seeks  to  establish  a  theory  of  normal  wages  in  a 
progressing  society.  This  is  a  point  on  which  we 
shall  have  more  to  say  in  the  next  chapter. 

153.  The  Unfair  Treatment  of  Malthus. — In  con- 
clusion, it  may  be  noted  that  some  economists  con- 
tinue to  this  day  to  direct  their  criticism  against  the 
teachings  of  the  first  edition  of  the  "  Essay  on  Popu- 
lation." For  them  the  "Essay"  has  never  gotten 
beyond  the  first,  or  at  most  the  second,  edition.  Mal- 
thusianism  continues  to  be  defined  as  that  pressure 
of  population  upon  subsistence  which  is  only  relieved 
by  the  direful  remedies  of  misery  or  vice.  Even 


THE  MALTHUSIAN  THEORY  OF  WAGES.       289 

when  notice  is  taken  of  the  fact  that  in  his  second 
edition  Mai  thus  recognized  that  moral  restraint 
played  an  important  part,  this  fact  is  only  employed 
to  refute  the  argument  of  the  first  edition.  It  is 
certainly  time  that  some  protest  was  entered  against 
this  essentially  unfair  treatment  of  one  of  the  ablest 
of  English-speaking  economists.  In  common  fair- 
ness it  should  be  remembered  that  Malthus  entirely 
abandoned  this  contention  as  -well  as  the  concept  of 
society  lying  back  of  it.  In  other  words,  he  no 
longer  has  in  mind  that  concept  of  society  in  which 
the  best  that  can  be  hoped  for  is  that  the  conditions 
of  life  will  not  become  worse.  Instead,  he  sees  a 
hopeful  progressing  society  in  which  the  passing 
years  will  bring  an  improvement  in  the  condition  of 
even  the  lowest  classes. 


CHAPTER    V. 

THE  NORMAL  VALUE  THEORY  OF  WAG-ES. 

I.  THE  GAIN  AND  ABSTINENCE  OF  LABOR. 
HAVING  followed  Malthus  in  his  escape  from  the 
pessimistic  view  of  society  which  characterized  the 
first  edition  of  his  "  Essay,"  we  are  now  in  a  position 
to  recognize  the  fact  that  normal  wages  may  contain 
a  surplus  above  the  mere  cost  of  subsistence.  This 
nowhere  finds  clearer  statement  than  from  the  pen 
of  F.  H.  Giddings  in  "  The  Modern  Distributive 
Process."  On  page  54  he  writes :  "  Nature  makes 
generous  advances  to  her  children,  but  inexorably 
enforces  payment.  A  given  amount  of  food  con- 
tains more  energy,  usually  to  be  set  free  through  its 
consumption,  than  was  expended  in  obtaining  it. 
Consequently,  the  value  of  work  is  usually  a  little 
more  than  the  value  of  the  antecedent  work  from 
which  it  was  evolved.  To  these  advances,  persistently 
utilized, — advances  converted  into  abilities,  abilities, 
in  turn,  put  forth  in  works, — the  progress  of  man- 
kind from  savagery  to  civilization  has  been  due." 
In  other  words,  social  progress  is  dependent  upon 
the  existence  of  a  surplus  in  normal  wages  in  excess 
of  the  amount  necessary  to  maintain  the  existing 
standard  of  life.  It  is  to  this  surplus  that  I  would 
restrict  the  term  gain  of  labor,  and  the  contention  of 
the  present  chapter  will  be  that  this  gain  of  labor  is 

290 


THE  NORMAL  VALUE  THEORY  OF  WAGES.  291 

in  all  respects  similar  to  that  surplus  return  from 
capital  to  which  the  name  interest  has  been  given. 
It  will  be  further  urged  that  in  the  case  of  both  of 
these  surpluses  we  are  dealing  with  a  mobile,  homo- 
geneous fund,  and  so  with  normal  value ;  that  both 
are  equated  to  some  disutility,  abstinence,  or  inter- 
ference with  consumption,  and  that  in  both  of  them 
there  is  an  exchange  of  present  for  future  goods. 
From  this  it  follows  that  a  theory  of  wages  may  be 
constructed  which  is  practically  identical  with  the 
"  Normal  Value  Theory  of  Interest." 

Much  of  the  work  necessary  for  the  construction 
of  such  a  theory  has  already  been  done  by  other 
economists.  A  review  of  their  work  will  therefore 
be  in  order.  In  the  review  of  the  productivity 
theory  of  wages  it  was  seen  that  labor  like  capital 
may  be  conceived  either  in  its  concrete  forms  of 
weaver  and  spinner  or  as  a  mobile,  homogeneous 
fund,  and  that  just  as  the  interest  on  capital  is  the 
earning  of  the  mobile  fund  of  capital,  so,  too,  the 
gain  of  labor  is  the  earning  of  a  similar  mobile  fund 
of  labor. 

154.  Clark's  Failure  to  recognize  the  Abstinence 
of  Labor. — We  have  seen  that  the  first  to  set  forth 
in  any  complete  way  the  important  distinction  be- 
tween the  concrete  forms  and  the  abstract  mobile 
funds  of  capital  and  labor  was  J.  B.  Clark.  Unfor- 
tunately, however,  Clark  did  not  follow  the  similarity 
between  capital  and  labor  to  its  legitimate  conclusion, 
for  he  failed  to  see  that  there  is  a  sacrifice  of  absti- 


292  VALUE  AND  DISTRIBUTION. 

nence  on  the  part  of  the  laborer  as  well  as  on  the  part 
of  the  capitalist.  In  this  connection  Clark  writes : 
"  Labor  is  not  the  only  sacrifice  incurred  in  the  cre- 
ating of  wealth.  Abstinence  entails  a  sacrifice  and  it 
increases  the  fruits  of  industry."  * 

It  is  here  manifest  that  to  this  writer's  mind  the 
sacrifice  of  labor  and  the  sacrifice  of  abstinence  are 
two  essentially  different  forms  of  sacrifice.  In  other 
words,  he  is  here  still  in  bondage  to  the  older  Mal- 
thusian  notion  that  wages  yield  a  bare  subsistence. 
Yet,  as  has  been  shown  in  the  preceding  chapter, 
the  moment  we  pass  to  the  concept  of  a  progressing 
society  we  see  that  normal  wages  must  include  a 
surplus.  If  the  similarity  which  Clark  has  sought 
to  establish  between  labor  and  capital  has  any  sub- 
stantial basis  in  fact,  it  should  lead  us  to  suspect  the 
existence  of  some  sort  of  abstinence  on  the  part  of 
the  laborer,  to  be  equated  to  this  surplus  in  his 
wages ;  just  as  the  abstinence  on  the  part  of  the 
capitalist  is  equated  to  his  surplus  or  interest.  The 
failure  of  economists  to  recognize  the  existence  of 
an  interference  with  consumption  in  the  experience 
of  the  laborer  is  readily  explained.  The  earlier 
economists  were  interested  in  the  problem  of  increas- 
ing the  total  wealth  of  a  people  or  nation  rather 
than  in  the  problem  of  distribution.  Modern  econo- 
mists, it  is  true,  have  taken  more  interest  in  the 


*  "  Distribution  as  determined  by  a  Law  of  Kent,"  Quar- 
terly Journal  of  Economics,  1891. 


THE  NORMAL  VALUE  THEORY  OF  WAGES.  293 

latter  problem,  but  they  have  largely  confined  them- 
selves to  an  attempt  to  determine  the  shares  secured 
by  men  as  producers,  ignoring  for  the  most  part  their 
interest  as  consumers. 

155.  Patten  on  the  Abstinence  of  Labor. — The 
first  to  abandon  this  traditional  attitude  and  seriously 
to  inquire  as  to  the  effect  of  consumption  upon  the 
distribution  of  wealth  was  S.  N.  Patten,  who,  in  his 
"  Theory  of  Dynamic  Economics,"  writes  as  follows : 
"  Every  increase  of  productive  power  lengthens  the 
time  during  which  a  man  can  work  and  have  a  sur- 
plus ;  but  with  every  increase  in  the  quantity  pro- 
duced more  time  is  needed  to  consume  it.  The  time 
needed  to  consume  goods  cuts  in  on  the  time  which 
might  be  used  to  produce  them,  preventing  the  day's 
work  from  being  prolonged  until  the  effort  of  pro- 
duction equals  the  pleasure  of  consumption. 

"  Let  us  assume  that  a  man  occupies  eight  hours 
in  sleep.  Sixteen  hours  are  thus  left  for  work  and 
leisure,  or  for  production  and  consumption.  If  the 
man  works  after  supplying  the  necessities  of  life,  the 
return  must  be  high  enough  to  pay  for  the  pain  of 
production  and  the  pleasure  in  consumption  which 
he  loses  by  spending  his  time  in  work."  (Page  57.) 

"  When  the  productive  power  of  society  has  in- 
creased beyond  a  certain  point,  the  efficiency  of  the 
workman  becomes  so  great  that  the  time  needed  to  con- 
sume what  he  has  produced  cuts  into  the  time  needed 
for  production ;  he  ceases  to  work  before  the  pain  of 
the  last  increment  of  production  equals  the  utility  of 


294  VALUE  AND  DISTRIBUTION. 

the  last  increment  of  consumption.  There  is  for  the 
efficient  workman  a  surplus  at  the  margin  of  pro- 
duction equal  to  the  pleasure  that  could  be  obtained 
in  using  their  time  in  unproductive  consumption." 
(Page  71.)  "  The  sacrifice  of  the  capitalist,  therefore, 
is  of  the  same  nature  as  the  sacrifice  of  the  laborer 
when  the  latter  gets  a  surplus  above  the  cost  of  his 
labor."  (Page  60.) 

In  this  recognition  of  an  abstinence  on  the  part 
of  the  laborer  identical  in  all  respects  with  the  ab- 
stinence on  the  part  of  the  capitalist  we  have  one  of 
the  most  important  contributions  that  has  yet  been 
made  to  the  theory  of  normal  wages. 

156.  Clark's  Restatement  of  Patten's  Conten- 
tion.— Clark,  in  a  review  of  "The  Theory  of  Dy- 
namic Economics,"  generously  recognizes  the  great 
importance  of  Patten's  contribution,  and  holds  that  it 
is  an  epoch-making  book.  He  then  restates  the  case 
in  regard  to  the  abstinence  of  labor  in  his  own  happy 
way.  "  It  may  well  be  that  the  last  hour  of  labor  in 
a  day  secures  to  the  worker  something  that,  in  itself 
alone,  is  worth  to  him  more  than  it  costs  in  the  way 
of  mere  fatigue  ;  but  if  the  gaining  of  it  entails  the 
imperfect  utilization  of  other  things  already  in  pos- 
session, then  the  acquisition  of  it  may  be  unprofitable. 
It  will  afford  no  surplus.* 

"  This  fact,  stated  in  another  way,  reveals  a  prin- 
ciple to  which  increasing  interest  and  importance 

*  Annals  of  American  Academy,  July,  1892,  p.  40. 


THE  NORMAL  VALUE  THEORY  OF  WAGES.  295 

attaches  as  the  industrial  process  perfects  itself. 
The  sacrifice  involved  in  labor  itself  is  coming  to  be 
largely  abstinence.  Confinement  rather  than  fatigue 
is  the  cause  of  it,  and  this  confinement  burdens  the 
man  by  that  withdrawing  of  utility  from  things  al- 
ready in  his  possession,  to  which  attention  has  just 
been  called.  To  the  man  who  is  confined  for  most 
of  his  waking  time  nothing  is  really  worth  what  it 
should  be,  and  some  things  are  worth  very  little. 
He  cannot  utilize  them.  Though  he  may  have  them 
in  his  house  he  is  kept  from  enjoying  them.  The 
man  who  works  twelve  hours  a  day  is  the  typical  ab- 
stainer of  our  modern  economy.  The  saddest  feature 
of  his  abstinence  is  that  it  is  practised  on  things  that 
he  actually  possesses.  He  abstains  from  the  full  use 
of  his  house,  his  garden,  and  his  furnishings  and 
decorations.  He  foregoes  much  of  the  enjoyment  of 
his  books  and  papers,  and  even  of  the  comelier  part 
of  his  wardrobe.  He  has  little  time  for  wearing  good 
clothes,  for  sitting  on  porches  in  summer,  or  before 
fireplaces  in  winter.  He  lacks  leisure  for  reading, 
etc. 

"  What  is  worse,  this  lack  of  time  takes  the  essen- 
tial utility  out  of  the  free  gifts  of  nature.  It  puts  a 
blight  on  air  and  sunlight.  It  spoils,  for  this  par- 
ticular man,  the  trees,  the  streams,  the  hills,  etc. 
'  We  want  to  see  the  sunshine/  the  worker  is  made 
to  say  in  a  somewhat  familiar  rhyme  that  expresses 
the  eight-hour  movement.  It  is  the  increase  of 
utility  that,  for  the  men  engaged  in  this  struggle,  two 


296  VALUE  AND  DISTRIBUTION. 

extra  hours  of  leisure  would  infuse  into  their  entire 
environment  that  is  the  real  object  to  be  secured. 
This  man  wants  to  make  the  sun  worth  something."  * 

II.  A  NORMAL  VALUE  OR  AN  EXCHANGE  THEORY  OF  WAGES. 

With  the  data  in  hand  we  might  readily  construct 
an  abstinence  theory  of  wages  that  would  be  identical 
in  all  respects  with  the  abstinence  theory  of  interest. 
This,  however,  would  give  us,  in  the  one  case  as  in 
the  other,  but  a  partial  solution  for  the  problem.  We 
are  here  dealing  with  a  mobile,  homogeneous  fund, 
or  with  normal  value ;  hence  disutility  and  utility,  or 
abstinence  and  productivity,  must  be  equated.  The 
marginal  saver  will  not  endure  the  disutility  of  ab- 
stinence unless  he  receives  a  corresponding  surplus 
in  his  future  product.  It  follows  from  this  that  any 
satisfactory  solution  of  the  wages  problem  must  take 
account  of  productivity  as  well  as  of  abstinence. 
While  special  laborers  may  receive  more  or  less  than 
normal  wages,  all  labor  that  is  free  to  move  must  re- 
ceive at  least  normal  wages.  How  much  this  will  be 
is  determined  by  the  product  of  such  free  labor  in  the 
least  productive  branch  of  the  whole  field  of  indus- 
try ;  in  other  words,  by  the  marginal  productivity  of 
labor.  This  raises  the  question,  How  is  this  margin 
or  the  supply  of  labor  determined  ?  The  answer  is  as 
follows :  The  increase  in  the  amount  or  efficiency  of 
labor  depends,  in  the  first  instance,  on  the  realization 

*  Annals  of  American  Academy,  July,  1892,  p.  41. 


THE  NORMAL  VALUE  THEORY  OF  WAGES.  297 

of  a  surplus  in  the  product  of  labor  above  the  cost 
of  maintaining  the  present  supply  of  labor  at  the 
existing  standard  of  life.  But  in  order  to  secure  this 
surplus  the  hours  of  labor  are  prolonged  beyond  the 
point  which  would  be  sufficient  to  maintain  existing 
conditions.  This  extension  of  the  hours  of  labor  in- 
volves a  postponement  of  present  enjoyment  or  an 
increasing  abstinence  on  the  part  of  the  marginal 
laborer.  It  is  this  abstinence,  therefore,  which  ope- 
rates in  restraint  of  the  extension  of  the  hours  of 
labor,  and  so  of  the  realization  of  that  surplus  in 
wages  which  is  the  necessary  condition  of  an  in- 
crease in  the  amount  or  efficiency  of  labor.  In  brief, 
then,  the  supply  of  labor,  and  so  the  margin  of 
production,  is  determined  by  the  disutility  or  absti- 
nence endured  by  the  marginal  man  who  postpones 
his  consumption  in  order  that  he  may  continue  his 
labor. 

It  might  further  be  urged,  in  support  of  the  Normal 
Value  Theory  of  Wages,  that  it  is  capable  of  state- 
ment in  much  the  same  terms  as  Bohm-Bawerk's 
Exchange  Theory  of  Interest.  We  have  already 
seen  that  we  are  here  dealing  with  normal  value,  or 
with  those  conditions  in  which  marginal  utility  and 
marginal  disutility  coincide.  It  only  remains  for  us 
to  show  that  in  the  gain  of  labor,  as  in  the  interest 
on  capital,  the  increase  in  value  is  a  function  of  time, 
and  that  somewhere  along  the  line  the  laborer  ex- 
changes present  for  future  goods. 

157.  The  Time  Utilities  of  Labor. — In  an  earlier 


298  VALUE  AND   DISTRIBUTION. 

chapter  we  learned  that  capital  has  to  do  with  utili- 
ties of  time.  That  is  to  say,  interest  arises  wherever 
time  is  necessary  to  mature  the  value  of  any  com- 
modity. It  matters  not  whether  this  time  is  necessi- 
tated by  the  course  of  the  season,  as  in  agriculture ; 
by  that  gain  of  power  with  a  sacrifice  of  time  which 
is  incident  to  all  machine  production  ;  by  the  season- 
ing of  lumber,  the  curing  of  skins,  the  aging  of  wine, 
or  the  returning  heat  of  summer  which  arouses  the 
demand  for  and  so  increases  the  value  of  the  ice  cut 
months  before, — all  involve  an  increase  of  value  as  a 
function  of  time.  And  so  we  are  led  to  conclude  that 
wherever  time  necessarily  intervenes  between  the  first 
investment  and  the  realization  of  the  product  in  its 
fully  matured  value  interest  will  arise.  Eliminate 
time  as  a  condition  of  the  increase  in  value,  or  as- 
sume that  the  increase  is  an  instantaneous  process, 
and  the  surplus  which  we  know  as  interest  fails  to 
appear. 

But  while  it  has  been  generally  recognized  that 
natural  forces  other  than  labor  need  time  in  which  to 
realize  or  manifest  themselves,  we  have  unconsciously 
continued  to  think  of  labor  force  as  though  it  was 
exerted  instantaneously  or  as  not  requiring  an  appre- 
ciable interval  of  time  in  which  to  manifest  itself. 
We  say  that  this  has  been  a  more  or  less  unconscious 
assumption,  for  the  moment  we  give  the  matter  any 
consideration  we  recognize  that  labor  force,  like  all 
other  natural  forces,  is  subject  to  time  limitations. 
From  this  it  follows  that  the  time  necessary  for  the 


THE  NORMAL  VALUE  THEORY  OF  WAGES.  299 

exercise  of  the  laborer's  power  may  cut  in  on  the 
time  necessary  for  consumption,  and  so  result  in  an 
abstinence  on  the  part  of  the  laborer. 

158.  The  Exchange  by  the  Laborer  of  Present 
for  Future  Goods. — If  there  is  any  abstinence  or 
postponement    of    enjoyment   on    the    part   of    the 
laborer  there  must  in  some  way  be  an  exchange  of 
present  for  future  goods.     We  are  here  met  by  the 
difficulty  that  in  the  payment  of  wages   it  is  the 
capitalist  and  not  the   laborer  who  surrenders   his 
claim  on  present  or  consumption  goods,  receiving  in 
exchange  unfinished  products  or  future  goods.    This, 
of  course,  would  serve  as  an  explanation  of  interest, 
but  if  we  are  to  account  for  the  gain  of  wages,  we 
must  show  that  in  some  way  the  laborer  surrenders 
his  claim  on  present  goods,  receiving  in  exchange 
some    form  of  unfinished    or  future    goods.      This, 
however,  is  not  so  difficult  a  matter  as  at  first  might 
appear.     For  the  payment  of  wages  by  the  capital- 
ist is,  after  all,  the  second  step  in  the  transaction. 
The  first  step  is  that  in  which   the   laborer   post- 
pones the  enjoyment  of  the  free  and  other  present 
goods  under  his  control  that  he  may  continue  his 
hours  of  labor.     For  this  he  receives  in  exchange 
the  unfinished  products  of  his  labor  or  future  goods. 
Later  on  he  exchanges  these  unfinished  products  for 
present  goods  in  the  form  of  wages. 

159.  Confusion  in  Patten's  Use  of  the  Terms  Cost 
and  Surplus. — This  brings  us  to  a  source  of  confusion 
which  was  developed  in   Patten's  discussion  of  the 


300  VALUE  AND  DISTRIBUTION. 

subject,  and  which  it  may  be  well  to  dispose  of  at 
this  point. 

Patten  writes :  "  The  sacrifice  of  the  capitalist, 
therefore,  is  of  the  same  nature  as  the  sacrifice  of  the 
laborer,  when  the  latter  gets  a  surplus  above  the  cost 
of  his  labor.  The  laborer  gets  this  surplus  because 
he  abstains  from  some  action  which  would  have  given 
him  the  same  surplus.  Like  the  capitalist,  he  is  paid 
in  this  case  for  a  negative  act  and  not  for  a  positive 
cost.  Viewed  from  the  position  of  society,  neither  of 
these  acts  is  a  cost,  as  they  do  not  increase  the  positive 
pain  which  the  members  of  the  society  must  undergo. 
Viewed  from  the  position  of  the  buyer  of  goods, 
both  are  costs,  because  he  must  give  a  larger  quantity 
of  goods  to  get  the  articles  they  produce.  Absti- 
nence of  either  kind  is  a  negative  cost  which  affects 
the  value  of  goods  in  distribution,  but  neither  is  a 
positive  cost  increasing  the  pains  of  production.  To 
delay  a  pleasure  or  to  change  from  one  occupation  to 
another  is  not  the  same  thing  as  to  undergo  a  pain, 
though  they  have  the  same  effect  on  the  value  of  the 
goods  to  consumers.  Aggregate  costs,  therefore,  are 
composed  of  two  elements, — the  positive  cost  of  pro- 
duction and  the  negative  cost  of  abstaining  from  the 
surplus  which  might  be  obtained  by  actions  in  less 
complete  conformity  to  the  interests  of  society. 
When  it  is  said  that  marginal  values  equal  the  cost 
of  production,  a  surplus  in  the  form  of  interest  and 
wages  is  added  to  the  real  cost/*  (Page  60.) 

Now,  not  only  are   the   terms  positive  cost   and 


THE  NORMAL  VALUE  THEORY  OF  WAGES.  3Q1 

negative  cost  far  from  happy,  but  the  contention 
that  one  is  a  real  cost  and  the  other  a  surplus  is 
distinctly  misleading.  And  so  we  find  that  Clark,  in 
his  review  of  "  The  Theory  of  Dynamic  Economics," 
takes  exception  to  Patten's  use  of  the  terms  cost  and 
surplus.  This  discussion  was  continued  through  sev- 
eral numbers  of  the  Annals  of  the  American  Academy 
without  reaching  any  very  definite  result.  To  the 
present  writer  it  has  seemed  that  the  source  of  the 
confusion  lies  in  the  tendency  to  confound  the  two 
essentially  different  concepts  of  society.  In  a  sta- 
tionary society  cost  is  the  actual  wear  and  tear  of  the 
tissue  of  capital  and  labor  involved  in  production. 
In  a  progressing  society  cost  equals  the  above  wear 
and  tear  of  tissue  plus  the  disutility  or  abstinence  in- 
curred in  securing  that  surplus  which  increases  the 
supply  of  capital  and  labor.  Both  are  social  costs, 
for  both  are  equated  to  normal  value.  In  one  in- 
stance, however,  we  are  dealing  with  cost  and  normal 
value  in  a  stationary  society,  and  in  the  other  with 
cost  and  normal  value  in  a  progressing  society.  In 
other  words  our  concept  of  cost  must  vary  with  the 
supply  of  capital  and  labor  that  is  assumed.  If 
we  desire  to  maintain  the  existing  conditions,  cost 
would  include  only  the  wear  and  tear  of  the  existing 
supply  of  capital  and  labor.  If,  however,  we  have  a 
progressing  society  in  mind  and  so  imply  an  ever-in- 
creasing supply  of  capital  and  labor,  then  the  absti- 
nence incident  to  the  maintaining  of  this  increasing 
supply  is  as  essential  a  part  of  our  cost  as  the  wear 


302 


VALUE  AND  DISTRIBUTION. 


and  tear  of  the  original  supply.     From  this  it  fol- 
lows that  the  interest  on  capital  and  the  gain  of  labor 
are  surpluses  if  we  have  in  mind  the  maintaining 
of  existing  conditions.     On  the  other  hand,  they  are 
part  of  our  costs  if  we  have  in  mind  an  increasing 
supply  of  capital  and  labor  or  a  progressing  society. 
160.  The    Modification   of  Patten's    Diagram.— 
The  diagram  referred  to  is  Fig.  5,  page  58  of  the 
present  volume.     The   suggested   change   is  shown 
in  Fig.  11,  in  which  the  interest  on  capital  and  the 

FIG.  11. 


Differential 
Consumers  Surplus 


Cost  in  a  Pro- 
gressing So- 
ciety 


Marginal  Consumers  Surplus 


Marginal  Producers  Surplus 


Differential  Producers  Surplus 

Differential  Cost 


Interest  on  Capital 


Gain  of  Labor 


"Wear  and  Tear  of 
Capital  and  Labor 


Normal  Surpluseg 


{  Cost  in  a  Stationary 
f      Society 


gain  of  labor  are  shown  as  a  part  of  the  cost  in  a  pro- 
gressing society  and  as  surpluses  in  a  non-progressing 
society.  In  the  latter  case  they  are  included,  as  is 
here  shown  under  normal  surpluses. 

161.  The  Normal  Value  Theory  only  applies  to 
Normal  Conditions  in  a  Progressing  Society. — The 
preceding  diagram  will  serve  to  bring  out  very 
clearly  the  scope  and  limitations  of  the  theory  of 


THE  NORMAL  VALUE  THEORY  OF  WAGES.  3Q3 

wages  here  proposed.  In  the  first  place,  and  as  its 
name  implies,  it  is  a  theory  of  normal  wages.  Again, 
it  is  only  applicable  to  normal  wages  in  a  progressing 
society,  for  in  a  stationary  society  the  normal  sur- 
pluses, interest  on  capital  and  gain  of  labor,  would 
disappear.  If  it  is  urged  that  the  theory  gives  but 
a  partial  solution  of  the  wages  problem ;  that  it  in 
no  way  accounts  for  market  wages,  we  must  admit  its 
deficiency.  On  the  other  hand,  it  might  be  urged  that 
market  wages  like  all  scarcity  prices  are  incapable  of 
exact  determination  or  of  reduction  under  anything 
like  an  exact  law.  (See  Sections  121,  to  123.)  Nor- 
mal wages  are,  however,  capable  of  exact  determina- 
tion, and  in  a  progressing  society  they  include  a  gain 
which  is  equated  to  an  abstinence  on  the  part  of  the 
laborer. 

A  theory  which  seeks  to  account  for  a  surplus  in 
wages  above  the  cost  of  maintaining  the  laborer  is 
likely  to  meet  with  serious  opposition.  Many  of  us 
still  hold  to  that  conception  of  society  which  ob- 
tained in  the  beginning  of  the  century.  We  fail 
fully  to  realize  that  in  a  progressing  society  both 
capital  and  labor  must  secure  a  surplus  above  the 
cost  of  maintenance.  We  see  this  surplus  quite 
clearly  in  the  case  of  capital,  because  it  is  frequently 
the  object  of  a  separate  payment.  In  the  case  of 
wages  the  surplus  is  not  thus  rendered  manifest,  the 
payment  being  in  the  form  of  the  total  amount  and 
not  of  the  surplus  alone.  And  yet,  if  there  is  any- 
thing in  the  contention  that  there  is  a  necessary  re- 


304  VALUE  AND  DISTRIBUTION. 

lation  between  capital  and  labor  as  mobile,  homoge- 
neous funds,  it  follows  -that  if  interest  is  a  necessary 
condition  of  progress,  then  the  gain  of  labor  is  like- 
wise a  necessary  condition  of  such  progress. 

162.  Failure  to  secure  this  Gain  due  to  Loss  of 
Mobility. — Finally,  it  may  be  urged  that  even  in  a 
progressing  society  there  are  many  who  do  not  secure 
any  such  surplus  or  gain  of  labor.  We  are  here 
dealing  with  a  question  of  fact,  and  must  perforce 
admit  that  it  is  too  often  true.  This,  however,  does 
not  tell  against  the  contention  that  in  every  progress- 
ing society  normal  wages  must  contain  a  surplus. 
For  the  surplus  that  we  here  have  in  mind  is  in- 
cluded in  the  earnings  of  labor  as  a  mobile  fund.  If 
you  interfere  in  any  way  with  the  mobility  of  this 
fund,  you  manifestly  change  the  conditions  of  the 
problem,  whether  it  is  capital  or  labor  that  you  have 
in  mind.  For  instance,  when  power-looms  superseded 
the  old  hand-loom  much  distress  was  undoubtedly  oc- 
casioned. Certain  portions  of  the  mobile  fund  of 
labor  had  become  fixed  in  the  concrete  form  of 
hand-loom  weavers,  and  the  distress  was  in  large 
measure  due  to  the  fact  that  these  men  had  lost  their 
mobility  and  could  not  readily  adapt  themselves  to 
the  new  conditions.  This,  however,  was  just  as  true 
of  the  capital  invested  in  the  old  hand-loom  as  it 
was  of  the  weaver.  Yet  no  one  would  argue  from 
this  that  capital  does  not  yield  a  surplus. 


RESUME. 

I.    VALUE. 

163.  The   Cost   Theory   and   its    Failure.  —  The 
present  volume   has   been  written  to  little  purpose 
if  it  has  not  made  clear  how  intimate  is  the  relation 
between  the  problem  of  value  and  the  problem  of 
distribution.     It  was  this,  indeed,  that  compelled  me 
to  preface  the  discussion  of  distribution  with  a  review 
of  the  literature  on  the  theory  of  value.     In  Chapter 
II.  it  was  seen  that  the  marginal  cost  theory  of  value 
failed  because  scarcity  values  are  not  the  exception, 
but  the  rule.    The  prevalence  of  these  scarcity  goods 
means  that  among  general  commodities  the  price  fre- 
quently contains  a  surplus,  even  for  the  marginal 
producer.     From  this  it  follows  that  even  marginal 
cost  must  fail  as  the  ultimate  standard  of  price. 

164.  The   Utility   Theory   and    its    Failure. — In 
Chapter  IV.  it  was  shown  that  the  marginal  utility 
theory  fails  for  a  like  reason, — to  wit,  that  the  price 
frequently  contains  a  surplus  for  the  marginal  con- 
sumer.    Qi,just  as  the  Marginal  Cost  Theory  rests  in 
last  resort  upon  the  assumption  of  ideal  free  competition 
among  producers,  so  too  the  Marginal  Utility  TJieory 
rests  upon  a  like  unwarranted  assumption    of  ideal 

20  305 


306  VALUE  AND  DISTRIBUTION. 

free  competition  among  consumers.  Any  failure  in 
this  ideal  condition  will  result  in  a  marginal  con- 
sumers' surplus,  and  in  all  such  cases  the  Margi- 
nal Utility  Theory  fails  as  the  ultimate  standard  of 
price. 

165.  Price  determined  between  Limits. — In  Chap- 
ter V.  the  monopoly  theory  of  price  was  discussed. 
It  was  there  urged  that  the  marginal  utility  of  the 
good  to  the  consumer  and  its  marginal  utility  to  the 
producer  only  set  the  upper  and  lower  limits  within 
which  the  price  may  vary.     It  was  also  maintained 
that  the  point  between   these   limits  at  which  the 
price  is  actually  fixed  is  more  or  less  indeterminate, 
since  it  depends  upon  the  relative  monopoly  strength 
of  buyer  and  seller.    From  this  it  was  concluded  that 
the  phenomena  of  price  cannot  be  reduced  under  any 
exact  law. 

166.  Cost   and   Price. — In    Chapter  VI.    it   was 
shown  that  in  the  case  of  freely  reproducible  goods 
price  is  directly  and  exactly  measured  by  the  mar- 
ginal cost  of  production.     Again,  it  was  shown  that 
while   scarcity  prices  are  not  directly  and  exactly 
measured   by  cost,  yet  some   concept  of  cost   does 
enter  into  our  determination  of  the  price  of  such 
goods.     Of  course,  it  is  not  the  cost  of  the  scarcity 
good,  but  it  is  the  cost  of  the  next  best  substitute 
that  enters  into  this  determination ;  for  there  is  no 
good  so  rare  or  so  valuable  that  some  less  efficient 
substitute  cannot  be  found  to  replace  it. 


RESUME.  307 

II.    DISTRIBUTION. 

In  the  development  of  the  theory  of  distribution, 
herein  proposed,  three  forms  of  surplus  have  been 
recognized : 

KENT,  OR  THE  DIFFERENTIAL  SURPLUS  that  does 
not  enter  into  the  determination  of  price. 

PROFIT,  OR  THE  MARGINAL  SURPLUS  that  does 
enter  into  the  determination  of  price. 

INTEREST  ON  CAPITAL  AND  GAIN  OF  LABOR,  OR 
THE  NORMAL  SURPLUSES  which  enter  into  the  deter- 
mination of  price  and  into  the  social  cost  of  pro- 
duction in  a  progressing  society. 

It  may  be  well  to  review  in  a  rapid  way  the 
argument  by  which  this  scheme  of  distribution  was 
developed. 

167.  Rent. — In  the  review  of  the  history  of  the 
doctrine  of  rent,  it*  was  seen  that  it  was  first  de- 
veloped in  connection  with  the  old  Corn  Law  agita- 
tion. It  was  practically  the  defence  set  up  by  the 
agrarian  interest  against  the  charge  that  high  rents 
compelled  the  payment  of  high  wages,  and  so  inter- 
fered with  the  manufacturing  interest  of  England. 
As  a  result  of  this,  the  doctrine  of  rent  was,  in  Eng- 
lish economics,  largely  confined  to  the  earnings  of 
land.  In  Germany,  however,  where  the  manufac- 
turing interests  were  much  slower  in  their  develop- 
ment, this  phase  of  the  agrarian  problem  had  not 
yet  arisen ;  hence  we  find  that  German  economists 
did  not  so  persistently  restrict  the  doctrine  of  rent 


308  VALUE  AND  DISTRIBUTION. 

to  the  earnings  of  land.  As  early  as  1807,  Hufeland 
recognized  that  rent  is  a  differential  or  price-deter- 
mined surplus,  and  that  it  is  common  to  all  the  fac- 
tors of  production.  It  has  seemed  wise,  therefore,  to 
follow  the  German  economists,  and  to  say  that  every 
price-determined  surplus  is  the  rent  of  the  correspond- 
ing factor  of  production* 

168.  Profit. — In  this  part  of  the  discussion  atten- 
tion was  called  to  the  fact  that  in  many  instances  the 
marginal  producer  secures  a  surplus;  that  this  sur- 
plus enters  into  the  determination  of  price,  and  so  is 
in  direct  antithesis  to  rent  or  the  price-determined 
surplus.  To  this  marginal  or  price-determining  sur- 
plus, whether  secured  by  merchant,  manufacturer, 
farmer,  or  landlord,  the  name  profit  has  been  given. 
It  is  distinguished  from  rent,  as  above  set  forth,  and 
from  interest,  by  the  fact  that  it  is  a  marginal  or  mo- 
nopoly surplus,  while  interest  is  a  normal  surplus. 

In  reviewing  this  part  of  the  literature,  it  was 
seen  that  there  has  been  much  confusion  in  the  use 
of  the  term  profit.  Sometimes  it  is  applied  to  the 
interest  on  capital ;  at  other  times  to  the  wages  of 
the  entrepreneur ;  while,  not  unfrequently,  the  terms 
profit  and  interest  are  employed  interchangeably. 
This  confused  use  of  the  term  profit  is  partly  due 
to  the  fact  that  the  earlier  economists  assumed  that 
the  prevailing  economic  conditions  are  those  of  free 
competition.  Under  such  circumstances  the  marginal 
or  monopoly  surplus,  to  which  I  have  restricted  the 
term  profit,  would  not  appear. 


BESUME.  309 

The  first  to  break  with  this  earlier  practice  in 
regard  to  the  term  profit  was  Walker,  who  restricted 
it  to  that  part  of  the  entrepreneur's  return  which  is 
a  differential  surplus  and  so  follows  the  law  of  rent. 
It  might,  however,  be  urged  that  if  this  surplus 
follows  the  law  of  rent  it  would  be  much  better  to 
follow  the  German  practice  and  call  it  the  rent  of 
the  entrepreneur.  We  are  thus  enabled  to  restrict 
the  term  profit  to  the  marginal  or  price-determining 
surplus.  This,  as  was  shown,  is  in  entire  agreement 
with  the  use  of  the  term  profit  by  the  earlier  econo- 
mists ;  for,  no  matter  how  confused  they  may  have 
been  on  other  points,  they  were  clear  that  profit  is  a 
surplus  that  enters  into  the  determination  of  price. 
From  this  it  follows  that  the  term  should  not  be 
applied  to  a  surplus  which  confessedly  does  not  enter 
into  this  determination. 

169.  Interest. — In  the  discussion  of  this  share  of 
the  social  product  we  first  reviewed  the  various  theo- 
ries of  interest,  including  the  Exploitation,  the  Use, 
the  Productivity,  the  Abstinence,  the  Marginal  Prod- 
uctivity, and  the  Exchange  Theory.  The  element  of 
truth,  as  well  as  the  defects  of  the  several  theories, 
was  pointed  out.  The  Exchange  Theory  was  exam- 
ined with  considerable  care,  and  it  was  found  that, 
while  its  author  expressly  repudiated  abstinence  as 
a  factor  in  the  problem,  yet  as  a  matter  of  fact  he 
includes  in  his  theory  of  interest  all  three  of  the 
essential  elements, — time,  productivity,  and  absti- 
nence. His  formal  ignoring  of  the  part  played  by 


310  VALUE  AND  DISTRIBUTION. 

abstinence  was  seen  to  be  due  to  his  failure  to  recog- 
nize the  fact  that  interest  is  a  problem  in  normal 
value.  In  the  development  of  this  part  of  the  argu- 
ment we  drew  very  freely  upon  Clark's  discussion  of 
the  two  concepts  of  capital, — one  as  a  sum  of  con- 
crete intermediate  products ;  the  other  as  an  abstract, 
mobile,  homogeneous  fund.  It  was  also  seen  that 
interest  per  se  is  the  earning  of  this  mobile  fund, 
and  that  it  is  determined  by  the  marginal  produc- 
tivity of  this  fund  or  by  its  product  in  the  least 
productive  industry  in  which  its  employment  is 
economically  permissible.  Again,  as  interest  is  the 
earning  of  a  mobile  homogeneous  fund,  its  determina- 
tion is  clearly  a  problem  of  normal  value.  If  this  is 
true,  then  we  can  no  longer  content  ourselves  with  the 
statement  that  the  rate  of  interest  is  determined  by 
the  marginal  productivity  of  capital.  The  question 
necessarily  arises,  What  determines  this  margin  or 
the  supply  of  capital  ?  To  this  there  is  the  manifest 
answer  that  it  depends  upon  the  abstinence  or  dis- 
utility endured  by  the  marginal  saver,  for  it  is  this 
abstinence  that  determines  the  increase  of  the  supply 
of  capital.  This,  however,  conflicts  in  no  way  with 
Bohm-Bawerk's  contention  that  interest  is  the  differ- 
ence in  value  between  present  and  future  goods. 
Instead,  it  confirms  that  contention  in  the  strongest 
possible  way.  To  the  exchange  theory  as  thus 
amended  we  gave  the  name  The  Normal  Value 
Theory  of  Interest. 

170.  Wages. — In  the  review  of  the  literature  of 


RESUME  311 

this  part  of  our  subject  the  various  theories  of  wages 
were  examined.  This  included  the  Wages  Fund 
Doctrine,  the  Residual  Claimant  Theory,  the  Prod- 
uctivity Theory,  the  Marginal  Productivity  Theory, 
and  the  Malthusian  Theory.  In  the  discussion  of 
the  Marginal  Productivity  Theory,  it  was  learned 
that  Clark  had  followed  Marx  and  developed  con- 
cepts of  labor  that  are  identical  with  Clark's  two  con- 
cepts of  capital.  In  other  words,  we  can  think  of 
labor  either  in  the  concrete  form  of  weavers  and 
spinners,  or  as  a  mobile,  homogeneous  fund  capable  of 
taking  any  shape  the  entrepreneur  may  desire.  It 
was  also  shown  that  the  rate  of  wages,  like  the  rate 
of  interest,  is  determined  by  the  marginal  produc- 
tivity of  this  abstract,  mobile,  homogeneous  fund,  or 
by  its  product  in  the  least  productive  industry  in 
which  it  will  find  employment  if  it  retains  its  free- 
dom of  motion. 

Again,  it  was  urged  that  in  dealing  with  labor  as  a 
mobile,  homogeneous  fund  we  are  dealing  with  normal 
value.  If  this  is  true,  it  follows  that  we  cannot  content 
ourselves  with  the  statement  that  the  rate  of  wages  is 
set  by  the  marginal  productivity  of  the  mobile  fund 
of  labor.  For  the  questions  arise,  What  fixes  this 
margin?  What  determines  the  supply  of  labor? 
Here,  again,  the  answer  was  found  to  be  that  in  a 
progressing  society  the  supply  of  labor  is  limited  by 
the  disutility,  or  abstinence,  endured  by  the  marginal 
laborer  who  abstains  from  the  enjoyment  of  free  and 
other  goods  that  he  may  continue  the  hours  of  his 


312  VALUE  AND  DISTRIBUTION. 

labor.  As  interest  is  a  surplus  above  the  cost  of 
maintaining  the  existing  supply  of  capital,  so,  too, 
there  is  a  like  surplus  in  wages,  or  a  gain  of  labor, 
which  is  in  excess  of  the  cost  of  maintaining  the 
existing  supply  of  labor. 

In  the  discussion  of  the  Malthusian  theory  we 
found  a  recognition  of  such  a  surplus  in  wages  as 
early  as  the  fifth  edition  of  the  "  Essay  on  Popula- 
tion." It  is  there  clearly  recognized  that  the  exist- 
ence of  such  a  surplus  is  a  primary  condition  of 
social  progress.  All  this  led  the  present  writer  to 
propose  what  he  has  styled  the  Normal  Value 
Theory  of  Wages, — a  theory  that  corresponds  in  all 
essential  details  to  the  Normal  Value  Theory  of 
Interest.  It  was  also  shown  that  as  the  latter  theory 
involved  an  exchange  of  present  for  future  goods, 
so,  too,  the  Normal  Value  Theory  of  Wages  in- 
volved a  like  exchange  of  present  for  future  goods. 
In  other  words,  they  might  both  be  called  either 
exchange  theories  or  normal  value  theories  of  in- 
terest and  wages. 

171.  Factors  of  Production  versus  Different 
Forms  of  Surplus. — It  has  been  seen  that  the  ortho- 
dox economists,  so  far  as  they  gave  any  thought  to 
the  problem  of  distribution,  threw  the  accent  upon 
the  several  factors  of  production, — land,  labor,  capi- 
tal, and  entrepreneur.  For  certain  purposes  it  will 
still  be  well  to  retain  this  subdivision.  It  must, 
however,  be  remembered  that  there  is  another  and 
much  more  important  subdivision, — rent,  profit,  in- 


KESUM& 


313 


terest  on  capital,  and  gain  of  labor.  The  first  sub- 
division is  more  objective,  and  so  was  the  first  to  be 
recognized.  The  second,  though  more  important, 
does  not  lie  so  much  on  the  surface  of  the  phe- 
nomena of  distribution.  The  relation  between  these 
subdivisions  is  best  shown  in  the  following  tabula- 
tion : 


FACTORS  OP 
PRODUCTION. 

THE  THREE  FORMS  OF  SURPLUS. 

DIFFERENTIAL. 

MARGINAL. 

NORMAL. 

Land*  

Bent. 
Rent. 
Bent. 

Bent. 

Profit. 
Profit. 
Profit. 
Profit. 

Interest. 
Gain. 

Entrepreneur  .  .  . 
Capital  

Labor    

It  is  here  seen  that  rent  and  profit  are  surpluses 
that  may  be  secured  by  all  four  factors  of  produc- 
tion, while  interest  and  gain  of  labor  can  only  be 
secured  by  those  factors  that  are  freely  reproducible. 

Again,  it  should  be  noted  that  interest  and  gain 
are  surpluses  if  we  have  in  mind  the  maintenance 
of  existing  conditions.  They,  however,  become  a 
part  of  costs  if  we  have  in  mind  a  progressing 
society.  It  is  therefore  conceivable  that  profits  might 
disappear  and  rents  be  confiscated  and  yet  society 
continue  to  progress.  But  it  is  seriously  to  be  ques- 
tioned whether  society  can  long  continue  to  progress 


Land  here  includes  all  natural  forces  except  labor. 


314  VALUE  AND  DISTRIBUTION. 

if  either  interest  or  gain  is  eliminated.  Here,  then, 
we  have  that  ideal  of  society  which  socialist  writers 
have  endeavored  to  define.  The  defective  analysis 
of  the  orthodox  economists  has,  however,  led  them 
astray.  In  common  with  these  economists,  the  social- 
ists failed  to  see  that  one  portion  of  the  earnings  of 
capital,  like  the  earnings  of  labor,  is  determined 
under  conditions  of  free  competition.  It  must  be  ad- 
mitted, however,  that  while  progress  depends  in  last 
resort  upon  the  realization  of  the  interest  on  capital 
and  the  gain  of  labor,  yet,  as  a  matter  of  fact,  progress 
has  in  the  past  been  largely  dependent  upon  the 
stimulus  of  rents  and  profits.  On  the  other  hand, 
it  may  well  be  true  that  society  has  not  only  paid 
more  in  rents  and  profits  than  was  necessary  to  se- 
cure the  desired  progress,  but  that  these  overdrafts 
have  materially  retarded  that  progress.  For  after  all, 
/the  only  social  justification  that  can  be  urged  for  rents 
J  and  profits  is  that  they  tend  to  resolve  themselves 
)  into  interest  and  gain  through  an  advancing  standard 
(  of  life. 

It  may  be  objected  that  we  here  employ  the  terms 
rent,  profit,  interest,  and  gain  in  an  entirely  different 
sense  from  that  sanctioned  by  common  usage,  and 
that  it  would  have  been  better  to  make  use  of  entirely 
new  terms.  In  reply,  I  would  plead  the  precedent 
established  by  the  earlier  economists  in  their  de- 
velopment of  the  doctrine  of  rent.  They  saw,  of 
course,  that  the  total  payment  to  the  landlord  is  a 
complex  return  which  includes  not  only  a  payment 


RESUME.  315 

for  the  land,  but  as  well  a  payment  for  the  money  in- 
vested in  permanent  improvements.  Having  shown 
that  the  first  was  determined  by  a  more  or  less  definite 
law,  they  restricted  the  term  rent  to  this  share  of  the 
total  payment.  It  is  this  method  of  procedure  that 
has  been  followed  in  the  present  study.  Having 
clearly  distinguished  three,  or,  if  you  like,  four,  forms 
of  surplus,  we  have  availed  ourselves  of  the  familiar 
terms  rent,  profit,  interest,  and  gain  by  giving  them 
a  more  restricted  meaning  than  that  which  prevails 
in  common  practice.  But  if  the  employment  of  these 
or  any  equally  short  terms  tends  to  obscure  the  im- 
portant differences  that  exist  between  these  several 
surpluses,  then  let  us  abandon  them  and  return  to  the 
more  cumbersome  terms,  the  price-determined  sur- 
plus, the  monopoly  price-determining  surplus,  and 
the  normal  price-determining  surpluses  of  capital 
and  labor.  After  all,  it  is  far  less  important  what 
terms  are  employed  than  that  we  should  clearly  dis- 
tinguish these  several  surpluses  in  our  study  of  dis- 
tribution. When,  for  instance,  J.  S.  Mill  tells  us 
that  rent  does  not  enter  into  the  determination  of 
price  except  in  the  case  of  scarcity  goods,  we  must 
have  our  several  surpluses  so  well  in  hand  that  we 
clearly  recognize  that  there  is  here  a  confusion  in 
thought,  due  to  the  including  of  two  forms  of  sur- 
plus, the  price-determined  and  the  price-determining, 
or  rent  and  profit  under  a  common  term, — rent. 

Again,  when  Wieser  urges  that  interest  is  not  a 
condition  of  progress  because  interest  is  high  in  non- 


316  VALUE  AND  DISTRIBUTION. 

progressing  countries  like  China,  it  is  manifest  that 
he  has  confounded  a  monopoly  surplus  with  a  nor- 
mal surplus  or  profit  with  interest  by  including  both 
under  a  common  term, — interest.  It  is,  as  I  have 
already  said,  far  less  important  that  we  should  re- 
tain the  familiar  terms  rent,  profit,  interest,  and  gain 
than  that  we  should  avoid  the  confusion  which  results 
from  the  confounding  of  these  essentially  different 
forms  of  surplus. 

172.  An  Essentially  Different  Scheme  of  Distri- 
bution from  that  proposed  by  Clark. — In  conclu- 
sion, it  may  be  well  to  note  that  the  scheme  of  distri- 
bution which  is  here  proposed  differs  fundamentally 
from  that  proposed  by  J.  B.  Clark.  He  writes : 

"  The  true  method  of  obtaining  a  law  of  distribu- 
tion is  not,  therefore,  to  eliminate  from  the  earnings 
of  society  the  element  of  ground-rent  arid  then  try 
to  find  a  principle  that  will  account  for  the  remaining 
elements  ;  it  is  to  eliminate  what  is  not  rent — namely, 
pure  profit — by  reducing  society  to  a  static  condition 
and  then  by  the  use  of  the  rent-law  to  account  for 
all  that  remains."  *  In  keeping  with  this  he  writes : 
"  Interest  is  the  rent  of  the  social  fund  of  pure 
capital.  It  is  a  differential  gain  in  the  fullest  sense  of 
the  term.  It  is  measured  by  the  Ricardian  formula, 
and  will  bear  all  the  tests  to  which  a  rent  producer 
can  be  subjected."  f 

*  Quarterly  Journal  of  Economics,  1891,  page  291. 
f  Ibid.,  page  303. 


RESUME.  317 

As  the  latest  statement  of  Clark's  views  upon  this 
point  are  nearly  a  decade  old,  and  as  the  first  volume 
of  his  completed  book  will  shortly  appear,  it  is 
hardly  in  order  to  attempt  any  review  of  this  part 
of  his  work  at  the  present  time.  It  is  manifest,  how- 
ever, that  he  here  divides  the  entire  social  surplus 
into  rent  and  profit.  I,  on  the  other  hand,  have 
recognized  three  forms  of  surplus, — the  differential, 
the  marginal,  and  the  normal ;  or  rent,  profit,  and, 
under  the  normal  surplus,  interest  on  capital  and 
gain  of  labor.  The  source  of  our  disagreement  is 
found,  I  think,  in  the  two  competing  differential 
concepts,  one  confined  to  the  single  industry  and  the 
other  including  the  whole  range  of  industry.  For 
reasons  given  in  sections  62,  66,  and  67,  I  have  fixed 
upon  the  first,  while  Clark  has  taken  the  second  as 
the  concept  having  the  greatest  economic  importance. 
If  Clark  has  not  modified  his  views  upon  this  point, 
it  will  be  in  order  for  the  reader  to  pass  upon  the 
two  schemes  of  distribution  when  his  work  appears. 


THE    END. 


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